Time for a Tobin tax

“Exposing financial services to effective tax rates similar to those of the luxury manufactured goods sector (say an effective tax rate of 25 per cent) would imply a tax yield of around 1 per cent of GDP or up to $4 billion a year. This estimate appears to be broadly consistent with estimates of around $100 bn/year for the world as a whole derived from the volume of transactions, after reductions in the volume of speculative transactions are taken into account.”

Something has gone wrong with the numbers here. 1% of GDP is somewhere on the order of $140 bn/year in the US, or $580 bn/year for the world, no?

You may be thinking too big here: the volumes may be such that an extremely small rate of taxation (in the tenths or hundredths of a percent, say) could bring in significant revenues while not being worth the while of the traders to circumvent…

But it’s not sexy.

Sadly, I’m serious. Bumper-sticker mentality must be fought with bumper-sticker mentality.

What you propose and what you endorse are both shameful, but the you are obviously beyond shame: You are a Marxist.

Which, of course, would be a far worse thing than being a right-wing sheep (who has no idea what a Marxist is) uncritically parroting brain-dead propaganda.

Reduce short-term trading? Yes. Raise significant revenue? I doubt it. When Sweden implemented this in 1984 it raised 3% if the revenue they had projected.

Right now, the proposal seems to be about 0.05% (0.1% RT) on all derivatives trades. That would be $76 RT for one WTI crude oil contract. A tax this high would literally destroy almost all (at least 95%) of the liquidity in the market, making very wide spreads that would hurt retail traders. This tax might actually be feasible if it were more like 5% of that rate (0.05% or less RT). Then you would still have traders to tax.

But the advocates of this tax seem more concerned with scapegoating than anything else. They have contempt for the idea that someone can profit off of asset price fluctuations at the expense of another and fail to see the value created by having liquid markets. When they suggest it’s payback for the 2008 crash, they don’t care that traders on regulated exchanges had nothing to do with any of it. Are they responsible for reckless CDS purchases by AIG? For corrupt credit agencies? For loose money and non-existent mortgage regulations in the U.S.? For the over-leveraging of financial institutions in general? For the bailouts? Of course not, but this doesn’t seem to matter. That’s not how this debate is being characterized.

Something has gone wrong with the numbers here.

1% of Australia’s GDP in 2003 was about $4 billion.

These are “notes [Quiggin] prepared for [Australia’s] Parliamentary Library a few years back”

I’ve always liked this idea. Surely, the Occupy Wall Street people should think about this.

Commies! Ahhhh!

It’s amazing, really. My fairly conservative British father (now 85) loves to recall that when he first came to the States in the 60s, he found the best way to shut an American up (or at least badly fluster them) was to say “oh, now you’re talking like a communist.” People were so scared of being labelled commies that it shut them up, even if they were not, in fact, talking like a communist. He still finds this terribly amusing.

Some things apparently don’t change. Commies everywhere! Under your beds! They’re gonna steal your precious bodily fluids.

It seems alright, but kind of minor, insignificant. If it’s all as corrupt as it appears: they sell shit for gold, and manipulate prices to the order of magnitude (as with oil prices a few years ago), what do they care about .5% tax?

Re Shelley at 6:

Your slogan is, “If Wall Streeters want to gamble, they have to pay the rake.”

If they’re arguing about whether they’re just gambling, you’re winning.

If you bundle some worthless subprime mortgages and sell them as AAA rated security, while simultaneously shorting it, your advantage is probably 50 million points.

Korea has a .3% (thirty basis points) tax on the seller of a stock. There is no tax on derivatives such as index futures and options so that’s where the gambling, volume, and volatility go. Probably that would happen in New York too. Already high frequency traders focus more on indices and futures than on individual “names”.

The tax law would have to outlaw implicit de-facto sales strategies such as the “return swap” (in which one party pays the other the return on a stock over a given time period). Then lawyers would start arguing over which contracts or instruments constitute implicit sales.

Also, a prohibition on usury, and fixed rates on FDIC-insured deposits.

“It doesn’t require complicated structural change . . .” are words for someone’s tombstone, I think. I fear re-instituting a complex structure may be a sine qua non of effective reform, and selling any reform on the basis that it avoids effective reform is how neo-liberalism is born. From such a seed, a field of noxious weeds blooms. Prohibiting the universal bank is a key requirement in many respects (and prohibiting the universal bank entails re-instituting a complex structure: the integrity of a network system depends on the opposing strategic interests of players, and universal banking fatally undermines that strategic opposition. It is a factor in regulatory capture, and not just of the government’s regulatory arms, but also the ratings agencies, house appraisers, title insurance, financial reporting and accounting standards, Fannie and Freddie, etc. Big is Bad; complex may be good and necessary.

A 0.5% tax kills any trade that doesn’t yield a 50 basis points advantage, which would be pretty large at this point.

And I think the tax should indeed be geared toward simply shutting down the casino, with revenue generation being decidedly a secondary consideration. As long as we’re talking about things that politically aren’t going to happen, shoring up federal revenue is better accomplished by simply reverting to (at least) the Clinton income tax rates.

How well did this work out for Sweden?

I’m with Bruce at 26. Glass-Steagall (or whatever the new version would be called) is absolutely necessary. The alternative is to take a look at how we regulate the banks here in Canada… which is largely a case of having far more stringent leveraging rules, and being willing to fine banks more than the profits they made off of a dodgy transaction.

I know, I know… that’s not the case right now, but that’s mostly because we have a clown car for a cabinet that seems bent on reproducing the Clinton-Bush disaster in our economy.

Bringing back usury laws is also a must, imho. I find Smith compelling in his argument about usury laws… once you acknowledge that all wealth comes from making things, what is the inevitable result of allowing people to make more money off usury than off manufacturing? I think a quick look at what’s happened to the US manufacturing base since 1979 (when usury laws were basically overturned via the USSC) pretty much tells the tale.

How well did this work out for Sweden?

That is indeed the obvious rejoinder to calls for a Tobin tax and I would very much like to hear Prof. Quiggin’s response. (It’s also the reason why I don’t think such a tax should be counted on for much revenue.)

I think it is pretty clear that the financial sector is under-taxed and that this creates the wrong incentives. However, I strongly recommend to read the IMF’s report on financial sector taxation. The FTT creates huge political and economic risks, and I think that insisting on that tax will prevent any financial sector taxation from being implemented. As an alternative, the IMF suggested to create a financial activities tax (FAT) that would aim at financial institutions (instead at transactions). That proposal looks far more likely to be enacted across the G-20, EU or whatever IO could deal with the issue. American leadership is desperately needed here..

(Even in tax-loving Europe, there is no chance of getting a FTT-agreement outside the Eurozone. On the other hand, the UK would be willing to agree to an EU-wide FAT.)

http://www.imf.org/external/np/seminars/eng/2010/paris/pdf/090110.pdf

A tax this high would literally destroy almost all (at least 95%) of the liquidity in the market, making very wide spreads that would hurt retail traders.

This isn’t really an argument unless you can explain also why it’s a good thing for society to have a highly liquid market that allows retail traders to make a lot of money.
A crackdown on gun stores in Arizona would destroy liquidity in the selling-guns-to-Mexican-drug-gangs market, and would therefore really harm gun store owners, but that doesn’t necessarily mean that it’s not a good idea.
If there is a good correlation between “volume of financial transactions going on” and “economic growth” then fine. But I am not sure that that correlation exists. Growing sophistication and size of financial markets has not gone hand in hand with faster economic growth in the US or Europe; the CDS market didn’t really exist ten years ago, and yet its existence has not meant a decade of prosperity.

Hmm. A few problems with the FTT (or Robin Hood).

1) Taxing spot FX in the European Union is illegal. That’s why the EU proposal doesn’t suggesting taxing spot FX. This free movement of capital thing, you see? So, if others apply an FTT which does apply to spot FX and the EU doesn’t, see all spot FX move to the EU (see Eurobond markets in London for an historical example). If spot FX not taxed anywhere, rather large hole in the tax net. If you wish to get rid of the provisions that make taxing spot FX illegal, please rewrite the EU Treaty. Good luck with that.

2) Diamond and Mirrlees. Don’t tax intermediate transactions if you can achieve the same end by taxing final consumption.

3) Incidence. The various reports, EU, OECD, IMF, G-20, all end up saying pretty much the same thing. In the long run incidence will likely be on workers’ wages as the cost of capital to companies rises. Not all that much of a surprise as when the UK’s Stamp Duty on shares was analysed it was the workers’ wages plus pension fund returns that bore the incidence of the tax.

4) Size of incidence. It’s entirely possible that the burden bourne will be higher than the revenue raised (Stiglitz and Atkinson 1980?). Incidence of corporate taxation can be over 100%.

5) The EU report itself states that the tax will not raise revenue. Yes, there will be revenue from the tax itself. It will also shrink the economy by 1.7 % (on a conservative basis, this is only including the cost of higher capital to large corporates) meaning that revenue from other taxes will fall by more than the new revenue from this tax.

So, a new tax that actually shrinks revenue, one where the incidence is to lower wages, not to “tax the banks” and the only saving grace is that maybe, perhaps, we’ve excessive volatility in prices which this would curb. That last being something that is highly arguable (as in, lots and lots of people disagree with JQ here).

It’s not an absolutely overwhelming case for this new tax, is it?

…and about being ‘effective,’ as a huge percentage of daily trading is by dark pools who win by trading in massive volumes intra-day for mere basis points (.01), a tiny tax will kill much of that, hurt the brokers dealers, while really not effective mom and pop buying JNJ and KO. That being said, it’s a pea-shooter against a Wall Street Juggernaut. Glass Steagal needs to be restored; deposits should not be mixed with self-dealing and trading. The GS and MS of the world sould go back to being partnerships, where only their capital – and not ours – is at risk.

Glass Steagal needs to be restored; deposits should not be mixed with self-dealing and trading. The GS and MS of the world sould go back to being partnerships, where only their capital – and not ours – is at risk.

Just to clarify, these are two separate suggestions – both have a lot to be said for them, but they don’t have to come together. And I’d argue there is less of a problem with GS gambling with my capital – ie if I am a GS shareholder – than there is with BOA gambling with my savings – ie if I have a BOA account. If I’m a shareholder, I know the risk.

Is high cost of capital actually a serious problem now, given the amount of money that governments have pumped into the capital markets through QE programmes?

I think an FTT is a bad idea and the energy spent campaigning for it would be far better used campaigning for an LVT.

Evidence (which I am unable to find at the moment) suggests that:

– It actually increases volatility.
– It is passed on over the medium term.
– It raises far, far less than forecasts due to trade reductions.

Conversely, an LVT falls entirely on rent and so cannot be passed on; it also spurs production.

“John, maybe you can explain how the transaction tax won’t distort the after-market for, say, a 5-year bond, when price discovery in trading depends heavily upon availability of short-term repurchase agreements which the proposed FTT would treat over time as multiple taxable events and so extend financing durations beyond the response horizons needed for managing inventories of such securities. And how this effect would not affect primary issuance (which as I understand it would not be taxable anyway).”

There’s a huge assumption that tamping down repeated trading a bit is not a good thing; at this point the burden of proof is on the people against it.

TBH I don’t see why we should stop at a Tobin tax. While its distinctive shape, and to a lesser extent flavour, make it somewhat iconic, and if there were prison camps for air cabin crew (another proposal worth considering, btw) it would probaby be used as currency in them, it still seems rather arbitrary to pick only on that.

In fact, I think singling it out would raise issues regarding universalisation and the rule of law. Though I suppose that could formally be circumvented by referring to triangular cross section. A really probing court challege might see through such a ploy, of course.

But in any case, surely it would make sense from a revenue perspective to extend the ambit of such a levy to cover Ferrero Rocher, Lindt bunnies and ducklings, and luxury chocolates too. And those marbled praline seafood things. Definitely tax them – tax them out of existence altogether. They are not objectively all that horrible; that’s the problem in a way: given a box of them I always eat too many and end up feeling a bit queasy.

It is true that I do not like my loot in life. How well you know me!

But I was also under the strong impression that this gave me the right to destroy us all — and, until this timely correction, had made plans to do just that.

The timer was at 0:00:28 and counting down, in fact.

Whew! Dodged a bullet with that one. Thanks, hattip!

That would at least sort out that entirely misleading stuff from Buffett about his own tax rates.

Warren Buffett is a full-on wanker, so I am not surprised. The fact that he’s basically a management consultant with money rather than any kind of actual investor (look at his failure of a Goldman Sachs investment) generally escapes notice. And unsurprisingly for a management consultant, he engages in vast amounts of wankery.

Myles, your definiation of wanker differs from most (most people find him intelligent, wise, and shrewd, among other qualities), and I’d say your definition of investor differs from everyone. He’s lost money in some investments – I guess your definition of investor is one that never loses a cent, so misers are investors in your view – but his long term track-record is pretty much second to none. He is clearly an investor and a businessman, and wildly successful at both, better than you are at character assassination.

Miscellany:

* I’d like to clarify that I don’t really think that there is any merit whatsoever in the idea of prison camps for air cabin crew. In fact I admire their recent stand against BA’s dirty tricks machine, and decry the propaganda dismissing as ‘perks’ travel benefits which are an essential part of their employment contract.

* there are even more who, while being far more amenable to reason, aren’t keen on the idea of robbing from the rich to give to the poor. – a certain D Davies seems to have suggested recently that that’s almost exactly how it must be framed. More constructively, has anyone got any ideas for alternatives? Accelerated Trickle-Down? Who could object to that?

* Myles, your definition of wanker differs from most – to be fair, I think this is probably primarily a defensive move though.

* Tim Worstall @57 seems to have been hanging around with the under 25s recently? if his use of question marks? apparently to transcribe what used to be called the antipodean rising inflection? is anything to go by, yeah?

* Is the aim changing behaviour or raising revenue? The two goals are more or less directly opposed (which is why heavy taxation of inelastic-demand, low-income smokers is dubious), though a tradeoff can of course be made. Some of the stuff these Wall Street/City types get up to just doesn’t need to be done, does it, and causes instability, bubbles, other problems. All that stuff can just be permanently banned, while we have our magic wands out. For the rest, there may be some merit in raising transaction costs (as cian et al suggest on the other thread) to try and discourage speculative trades.

Ken Rogoff has a fairly terrible attempt to shoot down the idea here:

http://www.project-syndicate.org/commentary/rogoff85/English

It’s like a checklist of this-is-why-people-hate-economists ticks. We have:

–Concerns about fairness and social justice referred to as “emotional” appeals. And would you believe that things are, in fact, A Bit More Complicated? They are!

–Belittling of opponents as technical ignoramuses. The tax is favored “by NGOs.” Who have Joseph Stiglitz and Paul Krugman as co-signers, but you know, just ignore them and focus on the hippies. The obligatory to-be-sure paragraph does mention Keynes and Tobin, but only to assert that we’re A Bit More Sophisticated now. Never mind whose work has actually shed light on the current crisis.

–Dismissal of experiences from outside the US and Europe. Sure, a transaction tax was implemented successfully in Brazil, but who wants to live there, amiright?

–Prices-as-information, always. (The tax would diminish that information, you see.) Never mind that implies converging on an equilibrium that never arrives.

–Unsupported, but supremely confident, assertions about the nefarious effect of taxes on behavior.

–Dumb mind-reading about the Real Intentions of the people behind the tax, similar to Greg Oliver’s bit about ‘scapegoating’ above.

If these are the best arguments against a Tobin Tax (yeah, that “Robin Hood” name’s gotta go), I’m feeling better than ever about supporting it.