Yves here. I want to clarify one key issue about a transaction tax. Its purpose is not to raise revenue. Its purpose is to discourage excessive trading, which is socially unproductive. Recently, many studies have found that an outsized financial sector is as drag on growth. The finer-grained ones have identified too many resources devoted to secondary market trading as the cause. “Secondary market trading” is all the buying and selling that happens after a company raises money, as in among investors, not sales of newly-issued securities from a company to investors to raise money. A certain level of secondary market trading is necessary and desirable so that an investor can sell if he wants to (as in he needs liquidity). But overly cheap liquidity makes it attractive to trade for purely speculative purposes, as the collapse in average holding times of NYSE stocks attests.
Now a transaction tax may indeed raise a lot of revenue. But the intent is to discourage undesirable activity, and it’s hard to estimate in advance how much trading volumes would fall with a well-designed transaction tax.
By Robert Reich. Originally published at his website
Why is there so little discussion about one of Bernie Sanders’s most important proposals – to tax financial speculation?
Buying and selling stocks and bonds in order to beat others who are buying and selling stocks and bonds is a giant zero-sum game that wastes countless resources, uses up the talents of some of the nation’s best and brightest, and subjects financial market to unnecessary risk.
High-speed traders who employ advanced technologies in order to get information a millisecond before other traders get it don’t make financial markets more efficient. They make them more vulnerable to debacles like the “Flash Crash” of May 2010.
Wall Street Insiders who trade on confidential information unavailable to small investors don’t improve the productivity of financial markets. They just rig the game for themselves.
Bankers who trade in ever more complex derivatives – making bets on bets – don’t add real value. They only make the system more vulnerable to big losses, as occurred in the financial crisis of 2008.
All of which makes Bernie Sanders’s proposal for a speculation tax right on the mark.
He wants to tax stock trades at a rate of 0.5 percent (a trade of $1,000 would cost of $5), and bond trades at 0.1 percent.
The tax would reduce incentives for high-speed trading, insider deal-making, and short-term financial betting. (Hillary Clinton also favors a financial transactions tax but only on high-speed trading.)
Another big plus: Given the gargantuan size of the financial market and the huge volume of trading occurring within it every day, this tiny tax would generate lots of revenue.
Even a 0.01 percent transaction tax (a basis point is one-hundredth of a percentage point, or 0.01 percent) would raise $185 billion over 10 years, according to the nonpartisan Tax Policy Center.
Sanders’s 0.5 percent tax could thereby finance public investments that enlarge the economic pie rather than merely rearrange its slices – like tuition-free public education.
After all, Americans pay sales taxes on all sorts of goods and services yet Wall Street traders pay no sales taxes on the stocks and bonds they buy.
Which helps explain why the financial industry generates about 30 percent of America’s corporate profits but pays only about 18 percent of corporate taxes.
Naysayers led by the financial industry’s lobbyists (the Financial Services Roundtable and Financial Markets Association) warn that even a small tax on financial transactions would drive trading overseas, since financial trades can easily be done anywhere.
Baloney. The U.K. has had a tax on stock trades for decades yet remains one of the world’s financial powerhouses. Incidentally, that tax raises about 3 billion pounds yearly (the equivalent of $30 billion in an economy the size of the U.S.), which is pure gravy for Britain’s budget.
At least 28 other countries also have such a tax, and the European Union is well on the way to implementing one.
Industry lobbyists also claim the costs of the tax will burden small investors such as retirees, business owners, and average savers.
Wrong again. The tax wouldn’t be a burden if it reduces the volume and frequency of trading – which is the whole point.
In fact, the tax is highly progressive. The Tax Policy Centerestimates that 75 percent of it would be paid by the richest fifth of taxpayers, and 40 percent by the top 1 percent.
It’s hardly a radical idea.
Between 1914 and 1966, the United States itself taxed financial transactions. During the Great Depression, John Maynard Keynes urged wider use of such a tax to reduce excessive speculation by financial traders. After the Wall Street crash of October 1987, even the first President George Bush endorsed the idea.
Americans are fed up with Wall Street’s financial games. Excessive speculation contributed to the near meltdown of 2008 – which cost millions of people their jobs, savings, and homes.
So why is it only Bernie Sanders who’s calling for a financial transactions tax? Why aren’t politicians of all stripes supporting it? And why isn’t it a major issue in the 2016 election?
Because a financial transactions tax directly threatens a major source of Wall Street’s revenue. And, if you hadn’t noticed, the Street uses a portion of its vast revenues to gain political clout.
So even though it’s an excellent idea championed by a major candidate, a financial transactions tax isn’t being discussed this election year because Wall Street won’t abide it.
Which maybe one of the best reasons for enacting it.
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important point – UK has FTT on stocks, it’s called stamp duty. despite that, footsie is considered one of the most important non us markets worldwide… so cries of how it would kill the secotr are a bit overdone..
mind you, the rise of cfds and similar to bypass sd led to issues of its own
Need a tax on the derivatives market.
I would think that would be part of the plan, particularly given the volumes. Sanders tends to do himself a disservice by staying at the 30,000 foot level, which is where execs generally are anyhow. But he doesn’t have enough surrogates going into the weeds on his behalf.
Sanders’ plan includes a smaller tax on bond trades—0.1%? unreliable memory here—and a smaller one yet on derivatives trades.
I’m more of a right winger, but this is one Sanders proposal I can fully support. There’s something seriously wrong with an economy that spends gigantic sums on building tunnels for optic cables so transactions can be processed two miliseconds faster. This automated flash trading is against everything financial markets are supposed to be about, it’s even against everything that speculation is supposed to be about. I also agree with Yves’s assessment that this isn’t about revenue extraction, but about curtailing harmful activities. However, given high levels of corruption in US politics and huge profits this new industry enjoys, is such an idea even feasible?
I believe I can appreciate why your statement took that discouraged turn. But the next move would be to say that, if such a good idea is made infeasible by a corrupt political order, doesn’t that then contribute to its indictment? That’s one reason why the current political situation is so changed from ten years ago.
I would add underclocking the stock exchange to augment the effect of transaction tax. It is perfectly sufficient for healthy economic activity to settle the transactions only in equal discrete time intervals, say once every minute. This would starve all HFT parasites, reduce the size of financial sector and its rent extraction from productive economic activity.
Why is this important proposal being ignored? Bribery.
Possible.
Sanders’ campaign has been mostly kept dark by the M$M (which includes National Propaganda Radio). If one hears/reads much about Sanders in the usual sources, it’s usually to patiently explain why he simply cannot win.
It’s exceedingly rare to hear/read much of what the substance of Sanders’ campaign compromises, and mostly then, what you’ll hear is fatuous twaddle about Sanders’ proposal (which isn’t fatuous but is presented that way) about free college.
So one has to come to blogs, such as this one, to learn more. Too bad most citizens don’t do that, but that’s the way it is. And there’s a reason for it. Clearly Sanders, at least, annoys the .01%. They don’t want his message getting out. There’s a reason for that, as well.
Hmm, I took this as another mark of Bernie’s genius. I figure that the ‘free public college education’ was not only a demonstrable and desirable social good but also a nice carrot to sell the FTT.
Agree w/Teddy and others about the unfairness of a market that permits nano-second trading for the suitably connected. Secondary market trading beyond basic liquidity does not benefit the real economy. The beneficiaries are speculators and managers whose remuneration is tied to share prices — that is, useless eaters.
The reason it is being ignored is because Bernie touted the tax as way to pay for college for all. The tax on financial transactions makes most people’s eyes glaze over, but they are very interested in the idea of free college. So I get the hook, but this means the the tax debate never occurs, all the discussion is about free college. Now both ideas have merit, but each should have its own debate. It would be also a way to build a consensus around a broader policy of finally reigning in Wall Street, including bring back the best parts of Glass Stegall. That’s how you get the discussion going. Decouple and debate.
The benefits of free academic tuitions are so large they are inestimable due to the myriad of benefits that would cascade throughout the economy. Why would anyone oppose such and how is such a plan pushed aside? Only through the greatest imbalance of invisible intransigent power the world has ever known.
This is an important idea, but I don’t think I’ve ever heard at what point such a tax would be imposed. If a large majority of high-speed automated trading results in cancelled trades, it would be of little use in curbing that if it were only applied to completed transactions.
The point is not necessarily to raise revenue (please, MMT anyone?) but to control behaviour. Putting a drag on HST would in itself be a public good. As I have said before, free tuition is a way to sell a tax on financial transactions. Debate all you like, but decoupling will lose the tax.
I concur that a drag on HFT would be a public good. But my question doesn’t imply raising revenue, rather how such a tax would be a drag on HFT in particular. A tax on transactions would (by definition it seems) not apply to cancelled transactions. So how would it impact the behavior of HFT, which relies heavily on cancelled trades, any more than it would any trading?
Probably “quantized” settling as proposed in another comment would have a greater effect.
You are right. If the purpose of the tax is to discourage HFT, the tax should be levied on each and every bid, not just completed transactions. According to Eric Hunsader HFT traders pay big bucks so they can have millisecond faster access to the market – which they use to place multiple bids they never intend to complete, thereby manipulating price, creating volume interest where little exists, etc. To end HFT you would have to tax each bid (at an very small rate, say .01%).
Are things like ETF’s included in this? I understand the need to curb many of the dangerous games of all the value detracting speculation and trading etc,. What I’m struggling with is I may make a few trades a year simply to rebalance my portfolio (amount of trades depends on whether markets are volatile or steady) once certain levels of over/under are reached. My rough calculation of this .05% tax, is it would cost me $500-$1000 maybe more a year. Not outrageous but a sizable enough increase for an infrequent trader/investor and I’m pretty sure, not part of the problem that is trying to be solved here. Plus, as if I’m not angry enough at Wall Street (I used to work in the industry, left of my own volition) it makes me wonder if I’m not being financially penalized for their greed and criminality. I want to support this but I hope there will be a little nuance (not too much though to ruin the whole purpose) to not ensnare everyone who makes a trade once in awhile.
“it would cost me $500-$1000 maybe more a year”
Unlikely. I suspect the 0.5% mark is an initial bargaining position. What everyone seems to be anxious to forget (or have forgotten) is that Sen. Bernie “amendment king” Sanders has been in Congress for a loonnng time. If he’s floating 0.5% in position papers, policy proposals, etc., it’s because he’s aiming to get 0.1 – 0.2% enacted. 200 bucks a year won’t injure anyone who can manage to maintain a brokerage account.
If the guy were truly the absent-minded, flyaway-haired nutty old dodderer the MSM wants him to be, he’d never have made it this far in life.
I realize that probably most of the objection to this is being fueled by the large houses own high frequency trading. I mean when you finance your own algorithms to figure out how to micro trade at high volume…you are talking about a lot of money. But I would also bet that some of it is the mutual fund and individual trader sector of the market. It isn’t really about hurting the small investor, it is about discouraging the small investor from trading as frequently. They are seeing their commissions get cut, because Mom and Pop don’t like the tax and put the brakes on. The stability of our economy and of our markets be damned, not to mention customer service.
My worry is that the financial giants would put enough lawyers on this to try and try to create a way to avoid paying this financial tax in pretty much the same way that they figured out how to not pay title recording fees. They would create an exchange (no doubt called something different) that would own large numbers of shares and trade some sort of “future” or agreement to transfer amongst each other. Can you have a 1 second future contract? .01 second?
You echo a concern I have about this as well. These parasites and their shyster lawyers are very good at finding or creating loopholes that benefits them, alone.
That said, it’s worth investigating and attempting to implement. It’s equally worth more wide-spread discussion about why it’s needed and what’s happening, but I won’t hold my breath on that score.
There have been one or two programs highlighting these high speed transactions on NPR, fwiw, albeit I don’t believe – no surprise – that any solution was suggested.
More practical solutions will be (1) to delink capital gains tax from income tax and (2) to collect capital gains tax at source.
Correct. No tax by the sovereign issuer of the currency has as it’s purpose the raising of revenue, of which the sovereign issuer already has an infinite supply. Taxes by the sovereign issuer merely serve to regulate demand.
Of course, try to explain to anyone inside the beltway how their currency actually works, and they’ll think you are crazy. They’ve been told incorrectly for 40 years, and DAMMIT! That’s enough to make it right.
Forgive my ignorance, but I don’t see why a blanket transaction tax of 0.5% or whatever would be preferable to a transaction tax of 5-10% applicable to the actual bad actors, i.e., the high-frequency traders. It seems like it would be easy enough to assess a genuinely punitive tax against the actual “speculators” who are flipping shares over the course of single trading session, i.e., to tax both HFT and day-trading out of existence. I also fail to see how a transaction tax of general application would significantly inhibit insider trading.
I think Reich is being a bit tone-deaf here. In a ZIRP environment, conservative investors are effectively foisted into the stock market, and are then reviled as speculators. Is it no longer politically acceptable for the little people to invest accumulated capital? We can’t all live off of political consulting and paid speeches like former Clinton-era cabinet ministers.
Oh, please. I’ve been “in the market” in mutual funds and lesser amounts of directly held stock for 20 years. If I traded enough to generate +$200 in transaction taxes, it would be a sign that I was getting bad advice, & was stupid enough to take it. If Bernie’s transaction tax were enacted, it would eradicate most institutional HFT efforts in under a year. Over a decade, it’s greatest benefit may be in slowing the erosion of middle class wealth by reducing excessive trading and associated fee skimming.
The guys in dress shirts in your local MSSB office in flyover are not actually your friends, and their service fees are much, much larger than they need to be in this era of electronic trading.
Guys in dress shirts in flyover country? Uh …. what? I’m not sure I’m following but you appear to be saying that you’ve conducted less than $40,000 in stock & mutual fund trades over the course of twenty years; in other words you don’t care about the actual merits of this transaction-tax proposal because you don’t have any money to invest anyway. Not a particularly compelling argument. At any rate, I thought the point of the proposal was to curb rank speculation, not to discourage old ladies from buying utility stocks. So why not target the actual speculators?
Sanders’ proposal of a securities transaction tax is being ignored for the same underlying reason proposals to tax accumulated wealth have been ignored.
“Behind every great fortune there is a great crime.” —Balzac
The bottom line of why this tax is ignored is the majority of people who vote doesn’t understand how the markets work. So they don’t understand how this would work and help. They keep voting for people who won’t make any significant changes to our society. Hillary won’t be any different she is going to be the same old horse leading the way. Sheeple !
Cancelled and no-op trades wielded with impunity are the root of the HFT problem. I’m not sure why many here are claiming a tax wouldn’t affect cancellations. The tax should be punitive especially for order cancellations under a reasonable holding period. It should also be much higher for non-listed OTC derivatives, repos, and all manner of exotic structured products, special vehicles, and dark pool (un)liquidity. The point is to force skin in the game.
Our gentle host wrote, “I want to clarify one key issue about a transaction tax. Its purpose is not to raise revenue. Its purpose is to discourage excessive trading, which is socially unproductive.”
Makes perfect sense – it’s the old adage, “If you tax something, you get less of it. The more you tax, the less you get.”
And if the revenue generated covers enforcement costs, that’s weevils in the porridge!
The bond part puzzles me to some extent. At least as applied to below investment grade stuff, because obviously Treasuries and IG are different animals.
First, the whole “high speed, high frequency” thing. Much of the time, it really isn’t. I mean, these are instruments that still trade through humans (via the phone or Bloomberg chat), and many of even $500 million plus issues don’t trade very often, period. In many bonds probably the most volume you see is immediately after issuance, and that’s more a matter of people either flipping a small allocation or topping up to get to their target, with the dealer often pretty much setting up the trades with their allocation strategy. So that’s a different animal than straight-up speculation (high frequency or otherwise).
Second, ok, you’re “taxing” bonds effectively 1/8 (0.1%, but I’m rounding as bonds are actually quoted in eighths, maybe sixteenths sometimes), presumably paid by one or both counterparties (split equally between buyer and seller?). I…don’t see how that is going to alter much of the trading that goes on. The bid-ask is effectively a bit wider, your mark when you buy something is a little lower (if you use bid-side), people complain more than usual. But High Yield is generally not something where paying up 1/8 is going to make or break your trading strategy, unlike with equities (where the high frequency guys play on fractions of fractions). At most you’re looking at trades in “on the margin” issues having a tougher time getting done in stable markets (because in a hot market everyone pays up anyway, while in a rout there is often no bid, period).
All a long way of saying, bonds – fine. Define the word “bonds”. Treasuries? IG? HY? Structured? And you want to realize how much in revenues from that?
Equities, on the other hand – no brainer. Tax away. If anything, tax them more than is currently proposed, because the point – to me – is not to raise revenue, but to severely disincentivize speculation (of either the high frequency or the regular kinds). Imagine, for example, if the tax was at 10% of the pre-commission trade value (i.e. just shares times price), payable by both buyer and seller. “But Panda, you’ll destroy secondary equity trading!” Precisely, children, because at the end of the day most of such contributes absolutely nothing productive to either the society or the economy. Now, maybe I’m much more extreme than the consensus, but my point is that what Sanders is currently proposing is well within what the industry can “eat” without changing its behaviour too much, in my opinion.
Of course before deregulation of commissions the US had a private version of the finacial transaction tax in terms of the fixed commissions. One way to compare is to look at commissions compared to the modern commission+ ftt. If the commissions were greater than unless you believe the market 30 years ago was defective it won’t make a lot of difference.