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Eisinger: Time to Revive Financial Transaction Tax

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Legal/Regulatory | The Trade February 6, 2013, 12:14 pm90 Comments

Time to Revive the Financial Transaction TaxBy JESSE EISINGER, ProPublica

J. Scott Applewhite/Associated Press

Chip Somodevilla/Getty ImagesRepresentative Peter DeFazio, Democrat ofOregon, top, and Senator Tom Harkin, an Iowa Democrat, above, say they will reintroduce a bill calling for afinancial transaction tax.

The unwritten rule of Washington debates about taxing and spending is to never consider anything new. Butwouldn’t it be wonderful if the pressure of the next few months’ debate changed that?

Last month, 11 European countries, including France and Germany, moved forward on introducing a minusculetaxon trades in stocks, bonds and derivatives. The tax goes by many names. It’s often called a Tobin tax, afterthe economist James Tobin. In Europe it goes by the more pedestrian financial transaction tax. In Britain, itgoes by the wonderful Robin Hood tax, and is supported in an often clever campaign.

On this side of the Atlantic, there is a ghostly silence on a transaction tax in respectable political quarters. Butthat might change. This month, Senator Tom Harkin, Democrat of Iowa, and Representative Peter DeFazio,Democrat of Oregon, plan to reintroduce their bill calling for just such a tax.

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A transaction tax could raise a huge amount of money and cause less pain than many alternatives. It could offsetthe need for cuts to the social safety net or tax increases that damage consumer demand. How huge a sum? Mr.Harkin and Mr. DeFazio got an estimate from the bipartisan Joint Committee on Taxation, which scores taxplans. It’s a hearty one: $352 billion over 10 years.

The money would come from a tiny levy. The bill calls for a three-basis-point charge on most trades. A basispoint is one-hundredth of a percentage point. So it amounts to 3 cents on every $100 traded.

And the bill contains some exemptions intended to make the tax more politically palatable. The first sales ofstocks (initial public offerings) and bonds are exempted, so that the markets’ capital-raising function isn’tharmed. Initial investments and withdrawals from tax-protected accounts, like retirement or education funds,also have a measure of protection.

Critics of such a tax cavil that it will harm our capital markets and won’t raise that much money. They arguethat such a tax cannot be enforced; that it will depress trading, leading to lower asset prices; and that it willultimately be passed on to retail investors.

These are anemic arguments, and are completely destroyed in anexcellent piece of myth-busting by a group inBritain called Stamp Out Poverty.

Lots of taxes are hard to collect, but this doesn’t seem like one of them. Sales taxes have decent compliance,and they are often collected by small businesses conducting commerce in cash. Trading, on the other hand, isconducted by large businesses on computers. This tax would be collected by the exchanges. If there’s noexchange involved, the buyer owes it. It would be paid on any trade carried out in the United States or by anyAmerican entity or individual (a corporation’s offshore subsidiaries can’t get around it).

If there is truly a concern, then the tax could be modified so that if it hadn’t been paid, neither the transactionnor any legal action arising from it would be enforceable in the United States judicial system. Voilà! Plenty ofcompliance.

But those who argue against the tax are blind to a sea change in the way society sees the financial sector. Theyshould be asked to make an affirmative case for more frenzied capital markets activity, rather than just assumethat tamping it down is malign.

Yes, trading costs have come down and trading has skyrocketed in the last decade and a half. What have wegotten for it? Bubbles, crashes, volatile asset prices and an outsize financial sector that extracts rents from therest of the economy. Rising volumes and tighter spreads haven’t delivered good economic growth, broad-basedwage growth or good jobs.

Nor have they even helped the stock market. Where is the boom in newly public companies? The Standard &Poor’s 500-stock index is only just now getting back to its peak before the financial crisis. The Nasdaq isn’tclose to the peak achieved in the year 2000. Stock market valuations are depressed.

So let trading costs rise again, if the Tobin tax would really lead to that. (Other factors, like brutal competition,might still keep them just as low.) Much of the trading that occurs in the market is socially useless. It mightnarrow slightly the spread between the prices at which securities and derivatives are bought and sold, but theminute there’s a crisis, the traders flee. They provide the kind of liquidity that is available only when it is notneeded.

The average American, who has limited exposure to the stock market, has little to fear from the tax and much togain. And if some of the high-frequency trading flees offshore? Good riddance.

Alternatively, let’s suppose that a transaction tax succeeds beyond expectations in bringing down excessivetrading and doesn’t raise as much as projected. Fine. The American capital markets will become less volatileand more connected to fundamentals. Pension fund and mutual fund managers will have an incentive to holdstocks longer and adjust their investing expectations. There is a scourge of short-term thinking in Americanbusiness; a transaction tax leans against this malign influence.

But what if the tide of technology and investor attention-deficit disorder continues apace, and trading does notdecline as much as the securities industry and its paid academic shills claim? That’s fine, too. We’ll take therevenue.

The politics of a transaction tax are fascinating. Mr. Harkin doesn’t have the juice to get it done on his own,several Senate staff members and Washington observers explained to me. The transaction tax would need to beembraced by some senators on the relevant committees, like finance or banking. The Senate Finance Committeeis a problem because Charles Schumer of New York, the heavyweight Democrat who serves on it, often acts asif his main constituency is Wall Street.

There have been hints of a possible anti-Wall Street/Big Bank coalition between Midwestern and WesternDemocrats and Republicans. The Ohio Democrat Sherrod Brown and the Louisiana Republican David Vitterdon’t agree on much, but they co-sponsored a bill calling for more bank capital. Charles E. Grassley, the IowaRepublican famous for skewering vested interests, serves on the Senate Finance Committee. Of course,Republicans have taken blood oaths never to support higher revenue.

If some kind of increase in taxes is inevitable, one that takes aim at high-frequency traders probably hits fewIowans and average Americans in general, while doing much good.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigativejournalism in the public interest. Email: jesse@propublica.org. Twitter: @Eisingerj

A version of this article appeared in print on 02/07/2013, on page B5 of the NewYork edition with the headline: The 0.03% Solution to Washington’sBudget Problems.

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Banking and Financial Institutions, DeFazio, Peter A, Federal Taxes (US), Harkin, Tom, Taxation, Tobin,James

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1. Ace TracyNew York

For the comments screaming about a new tax, they should realize that Wall Street firms have beenpushing through transaction fees of their own. The fee is priced a cents per trade, so the big, big tradesfrom pensions, hedge funds, etc. pay as a % a very low transaction fee. Yet the small investor whoprobably buys $5000 to $10,000 in a trade pays a much much higher %.

So look at your own brokerage statement and figure out the % you are really paying in transaction fees.And this is going straight into the bonus checks of already overpaid CEOs.

INCREASE THE SHORT TERM CAPITAL GAINS TAX RATEThe low, low rates that day traders, program trades, hedge funds, and derivative traders pay on their shortterm gains (often held for minutes or days) is what is fueling the rampant leveraged speculation in theworld financial markets.

Short term capital gains tax rate is based on the marginal income tax rate, often just 28%. Before theReagan tax cuts this rate was up to 70%+. Though it made sense to drop the income tax rate, it made nosense to drop the S/T gains tax rate by 2/3. The result has been a boom/bust market. To remedy this,Congress should set s/t gains tax rate at 80% for a day trade graduated down to 50% for 1-year trade.

Only this change will bring back INVESTORS, and stop the speculation.

Feb. 7, 2013 at 6:49 p.m.

2. Gary ReberMurrieta, CA

While essentially a tax on Wall Street buy-and-sell trade "gambling" transactions, a transaction tax couldraise a huge amount of money.

Of course, the better solution is to address the CONCENTRATED OWNERSHIP issue of incomeinequality and use the word OWNERSHIP as that is what ties one to the property rights to derive incomefrom the non-human factor of production––productive capital––in the form of prime corporate stockdividends. Such financial structures are not well understood.

A National Right To Capital Ownership Bill that restores the American dream should be advocated byReich, which addresses the reality of Americans facing job opportunity deterioration and devaluation dueto tectonic shifts in the technologies of production.

There is a solution, which will result in double-digit economic growth and simultaneously broadenprivate, individual ownership so that EVERY American's income significantly grows, providing themeans to support themselves and their families with an affluent lifestyle. The Just Third Way Master Planfor America's future is published athttp://foreconomicjustice.org/?p=5797.

Support the Capital Homestead Act athttp://www.cesj.org/homestead/index.htmandhttp://www.cesj.org/homestead/summary-cha.htm

Feb. 7, 2013 at 6:06 p.m.

3. robWashington

There's a huge overlooked fact in this discussion.

Since we have huge securies exchanges, there's a lot of extra demand for the dollar.

Its the reserve currency that must be bought to move money around.

What happens to that demand when these exchanges move offshore to avoid the tax?

How does that effect your standard of living and other things, like government treasury rates?

This tax is a self inflicted harm to anyone, but especially us.

Feb. 7, 2013 at 5:54 p.m.Recommended2

4. DrewLA

Don't listen to this illogical garbage. Why would we want to model our system on the bankrupt EU?Bloomberg has a great article on the likely affect of a Tobin tax.

Eurobond 50th Anniversary Shows Tobin Tax Riskshttp://www.bloomberg.com/news/2013-02-04/eurobond-50th-anniversary-shows...

Feb. 7, 2013 at 5:28 p.m.

Recommended2

1. Ace TracyNew York

Just to correct your perception of Europe, Germany is NOT bankrupt, nor any of the countries withmajor exchanges.

The USA economy would love to have Germany's low, low unemployment rate.

Not saying it is perfect in the EU, but it certainly has many positives this country could learn from.

Feb. 7, 2013 at 6:25 p.m.Recommended1

5. ChicagoFuturesTraderChicago IL

Sorry, but you lost me at: "Much of the trading that occurs in the market is socially useless."

Tell me, how do you determine which trades are socially beneficial and which ones are useless? How didyou gain that special insight to determine which economic activities should be allowed and whichshouldn't? Isn't it possible that the "useless" trades that you disparage actually generate helpfulinformation for people in the economy outside of the financial markets?

Feb. 7, 2013 at 5:07 p.m.Recommended5

6. robWashington D.C.

There are so many reasons that this tax is a lot worse than it sounds to the less mathematically inclined. .(2 isn't a large number. . What about 2^10?)

But here's the easiest one: securities exchanges are electronic and can move to anywhere in the worldliterally overnight.

Feb. 7, 2013 at 4:27 p.m.Recommended4

7. JChicago

When you say a financial transaction tax could raise a huge amount of money and cause less pain thanmany of the alternatives, you highlight precisely why this is such a terrible idea. While it is simplistic andan easy sell to the general public, it ignores that the painful alternatives involve reducing governmentspending so that the “entitlement” programs (many of which are not an “entitlement” but due to peoplewho have paid their taxes) can survive long term based on even- handed and fair applications, that the taxcode needs repair and the securities market structure requires thoughtful fixes to make capital raising andtrading safer and more effective. It is much easier to continue to paint every trader with the same brushand ignore the work that needs to be done. Capital markets actually matter. I have no doubt that atransaction tax would cause a huge contraction in the economy and that long-term it would hurtconsumers in part because it will affect the trillions that individuals hold in their retirement funds andmutual funds. If a transaction tax passes, I’ll be the first to put my retirement funds in a standard bankaccount. Aside from the tax itself, when the liquidity contraction hits, watch the markets swing, baby.Why would you pave a path that will facilitate government officials continuing to ignore the roads thatrequire fixing in order for our nation to travel safely into the future? I expect our legislators like yourarticle very much.

Feb. 7, 2013 at 4:19 p.m.Recommended4

8. Abe FromanAustin TX

For those who believe in this tax, I have some advice: next time you're in a really long line behindhundreds of people, try cutting to the front of the line. And when the people object, tell them "if you letme cut in line, it saves me an hour but it only costs each of you a few seconds, because there are so manyof you . . so it makes sense that you let me cut".

See how that works out for you. Sure its a ridiculous idea, but it just might work because It's the sameconcept as this tax . . harm doesn't matter as long as you spread out among a lot of people.

Feb. 7, 2013 at 12:45 p.m.Recommended3

1. DanielBrooklyn, NY

That's not even close to an accurate analogy. The vast majority of people who trade in the marketswill never even notice a tax of three basis points. Even when three basis points is a considerableamount of money because a trade is very large, it will not substantially effect the incentives or

outcomes for the parties.

The only people who will be hurt by this tax are high frequency traders who trade thousands oftimes for the very slimmest of margins. For those traders, a three basis point tax will completelyswamp their profit on many trades, and render them substantially less profitable.

There is an honest debate to be had on whether that is a good outcome. Some would argue thatHFTs improve market liquidity and efficiency in pricing. Others argue that HFTs distort pricingand add dangerous volatility to the markets. Having that debate is helpful. Shrill whining about"fairness" is not.

Feb. 7, 2013 at 5:05 p.m.Recommended2

9. Venturenj

we need to get the great capital allocations to give money to grow business...instead of crazy stockmanipulation and gaming various markets for rewards. GROW BUSINESSES! Instead we have the FEDprinting money so Goldman can corner, Oil, Corn, and other markets.

Feb. 7, 2013 at 12:44 p.m.

10. James BarrettChicago

clueless idea that will not have a chance to raise anywhere close to what Harkin thinks. He'll have to lookfor another way to find money to subsidize his stupid ethanol .

Feb. 7, 2013 at 12:44 p.m.Recommended3

11. Jim S.Cleveland

A lot of people made a lot of money for a lot of years paying brokerage fees of several percent (i.e. acouple of hundred basis points). Why would three basis points stop things today?

Feb. 7, 2013 at 12:44 p.m.

12. TDCA

The financial transaction tax is not a tax on Wall Street – It’s a tax on Main Street.

-- The Secretary General of the European Federation for Retirement Provision says the FTT is not a taxon Wall Street, but rather a tax on retirement savings and other “innocent bystanders.”

-- James Tobin’s co-author, Berkeley Professor Barry Eichengreen, says the Tobin tax is the “wrong tool”to raise revenues.

-- A study by the World Bank concluded that “… neither the tax revenues nor the efficiency gains hopedfor… are likely to materialize.”

-- The IMF showed that the best way to hold banks responsible is to tax them directly because the FTTtax burden would “fall largely on final consumers,” not the financial sector.

-- Most empirical evidence shows that “higher transactions costs are actually associated with more, ratherthan less, volatility.”

To learn why a diverse group of people from many different backgrounds opposes the FTT, please read“Straight talk about the FTT” at: www.financialtransactiontaxes.com . (Includes over 40 references withresearch from experts around the world.)

Feb. 7, 2013 at 12:44 p.m.Recommended2

1. Ace TracyNew York

Yet these same people have no problem promoting hedge funds that charge huge, huge fees: like2% plus 20% of profits. Many mutual funds have fees up to 5% plus annual expense rations of 2%and annuities are off the charts with initial 7% fees.

What has hurt pensions and the world economy has not been taxes, but rampant leveragedspeculation.

Feb. 7, 2013 at 6:29 p.m.

13. JBNaperville

Really? Another proposed tax that impacts anyone owning a IRA, 401K, 403b, pension et al plans?Hardly novel wanting to tax someone today.

Let's try something really unique -- across the board cuts in spending -- not reduced growth of budgetsbut actually cuts in spending.

I am sure the writer voted for PBO. BTW, how is the president doing with job growth? Still blamingBush?

Oh, PBO is too busy deflecting economic issues with social issues with the compliant journalists, whoeffectively, are no more than Mad Ave advertisers.

Son, I have a suggestion for you: follow the WH speech writers to Hollywood. Oh, btw, let me tax you onthe margin at 90% for the drivel you will produce.

Feb. 7, 2013 at 12:42 p.m.Recommended2

14. ChrisNew York, NY

Massaya,

Reread what I wrote. I am, "entitled to keep what I earn." Did I sleep through some Socialist revolution?

Who the heck wants to pay more taxes? You know, I'd say the same for you, assuming you have earnings.I wouldn't want them taken away from you either. You earned it. You should keep as much of it as youcan.

Taxes are great so long as someone else pays them! You've a neat philosophy. If taxes are so worthwhile,vital, etc., then please feel free to add a zero to whatever check you write to the IRS come April 15.

Feb. 7, 2013 at 12:40 p.m.Recommended1

15. A one percenterUSA

Target frequent traders by making it graduated - .05% if you hold it less than an hour, .04% if you hold itless than a day, .03% if you hold it less than a week, .02% if you hold it less than a month and .01% ifyou hold it less then three months.

Capital markets are socially valuable only in so far as they channel capital towards real investments inreal businesses with long term strategies that generate growth and jobs etc. Short term, rapid fire tradingdoesn't really further that end.

Short term traders provide "liquidity" but the value of such liquidity is questionable and generally onlyvaluable to other short term traders looking to get in and out of positions. That said, long term investorslike to know they can get out of their positions eventually, but such a tax would not destroy liquidity alltogether...

Feb. 7, 2013 at 12:39 p.m.Recommended1

16. LeaningleftFort Lee

To the barricades! Off with their heads!

OR

Stop spending! Stop spending!

Feb. 7, 2013 at 12:37 p.m.Recommended1

17. MikeSeattleSeattle,WA

Retail investors will pay this, and the big banks will be exempt, just as the case is with the UK "stamptax", or look to Sweden where market volume collapsed to virtually nil. Such a tax would simiply lead tomarket distortion, and the grandiose projections of revenue would fall dramatically short.

They're trying to punish the equity markets (which give us things like startup companies, such as Apple,that employ people) for the sins of large-scale debt/derivatives in the housing market. We'll all pay theprice if this transaction tax becomes reality.

If the real goal is to curb trading in strange derivatives, then the recipe is simple: ban those derivatives. Oreven all derivatives. I doubt it would hurt equities at all.

The upshot of this tax has far less to do with "punishing Wall Street" that it would first appear -- it's apower grab.

Feb. 7, 2013 at 2:24 a.m.Recommended2

18. S.S.

S.E. Asia

As a friendly Asian competitor I am thinking people who write about an economy-destructive tax shouldfirst get their mathematic calculations right.USA is supposed to be the largest financial centre in the world. Surely not foolish enough to fall for ahighly discredited tax experiment that would reduce it to small fry, the small relation to burgeoning Asia?This is well understood as a net revenue negative tax, the sums just do not add up and even worse, theexponential damage across all supporting industries would result in hundreds of thousands of lost jobs,small investment damage and more off-shoring.

Very bad idea. No sane government would touch this with a 100ft barge pole.

Feb. 6, 2013 at 11:45 p.m.Recommended5

1. BradChicago

What is this, some kind of fake Goldman Sachs troll? Although reading it was pretty funny!

Feb. 7, 2013 at 12:34 p.m.

19. atronChelsea

This is such a no-brainer. Unfortunately today's politicians have no brains.

Feb. 6, 2013 at 10:45 p.m.Recommended6

20. OSS ArchitectSan Franciso

Well .03% may not be much, but at least the large multi-national US companies that park trillions ofdollars offshore to avoid US corporate taxes, may someday be paying something to the government,finally....

Since the UK already imposes a tax on transactions, and all the major European markets may shortly haveone (on derivatives as well as stocks), the US markets become the preferred place to do trades levergingthese offshore assets. - if Wall Street can continue to beat back Harkin/DeFazio with their friends inCongress.

Talk about a "Win-Win" for a select few.

Crank up that soundtrack on taxing widows and orphans!

Feb. 6, 2013 at 10:45 p.m.Recommended5

21. An Ordinary AmericanPrague

It's interesting that Mr. Eisinger mentions only in passing this tidbit: "The Senate Finance Committee is aproblem because Charles Schumer of New York, the heavyweight Democrat who serves on it, often actsas if his main constituency is Wall Street."

In fact, that is not just a "problem". It's a BIG "problem". And I do wish the Times would use its influenceon the op-ed pages to take Mr. Schumer on.

Feb. 6, 2013 at 10:45 p.m.Recommended12

22. EinsteinAmerica

Could the author please clarify.

No one wants a tax on ALL financial transactions. Don't scare people!

A 1% tax on WALL STREET transactions is all that's needed and would be extremely beneficial for oureconomy.

Feb. 6, 2013 at 10:20 p.m.Recommended1

23. HenryNew York

No- cut this ridiculous entitlement spending and pork. Obviously once a 3 cent per $100 dollar tax isimplemented we'd been on the slippery slope to higher rates. As Vergil stated: Facilis descensusaverno(the path to hell is paved with good intentions)

Feb. 6, 2013 at 10:16 p.m.

Recommended3

24. O'BrienAirstrip One

Dear God,

Hi, It's me, O'Brien. Let this talk of the "transaction tax" be the first step toward taxing consumptioninstead of earnings, and overall wealth instead of earnings.

O'Brien

Feb. 6, 2013 at 10:16 p.m.Recommended2

25. mkBuffalo

Corrections:1. EU FTT tax is one country idea being forced on the rest using administrative loopholes in EU treatydespite being opposed by a number of countries.2. Capital gains and income from capital are taxed and this is call for double taxation.3. Capital is producing income and appreciates and therefore is treated differently than ordinarytransactions because free flow of capital, risk taking was engine of accelerated growth.4. FTT will restrict free flow of capital and turn capital into budget removing portion of it from freeeconomy.5. Loopholes and exemptions will benefit big banks and market makers and the cost of transaction will besolely paid by retail investor.6. All people are affected by capital markets including those not directly participating7. IPO market and US capital markets suffered from overregulation and high barrier of entry imposed bynew laws introduced recently and this will be no different with FTT8. FTT will help create black market and physical goods exchange or will repatriate capital to Asia.9. Are there any other economic ideas beside taxation and more regulation of economy?

Feb. 6, 2013 at 10:16 p.m.Recommended4

1. MouseNYC

'...because free flow of capital, risk taking was engine of accelerated growth...'

And that growth was where exactly? Besides in the pockets of the 001%?

Feb. 7, 2013 at 12:34 p.m.

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