FacebookTwitterGoogle+RedditEmail

The Specious Case Against a Financial Transactions Tax

by DEAN BAKER

With the European Commission seriously considering a tax on financial transactions (sometimes referred to as a “speculation tax”), the opponents of such a tax are shifting their campaign into high gear. We are hearing predictions of disaster from the financial industry and friendly economists if the European Union goes this route.

The opponents’ claims go along three lines:

  1. The tax will not be enforceable;
  2. The tax will just be passed on to consumers and therefore will not be taking money from the intended targets in the financial industry;
  3. It will raise the cost of capital and therefore slow growth.

Each of these objections are either altogether wrong or hugely exaggerated.

The claim that financial transactions taxes are not enforceable is disproven by the fact that many countries — including China, Hong Kong and the United Kingdom — have financial transactions taxes in place and raise substantial revenue through the tax. In the UK, the tax raises an amount that is between 0.2 and 0.3 percent of GDP each year ($30-$40 billion in the United States). This is done by just taxing stock trades. It does not tax bonds, options, futures or the other derivative instruments that would be subject to the tax being considered by the EC.

Furthermore, the HM Revenue and Customs in the UK reports that the stock transfer tax has the lowest administrative cost of any of the taxes it administers. One factor helping compliance is that a party does not have legal ownership of shares of stock unless they can show that they have paid the tax. This sort of creativity can substantially reduce enforcement problems.

The second objection is that brokers and dealers will simply pass the cost of the tax on to their customers, so that ordinary investors bear much of the brunt of the tax, not the financial industry. This argument ignores basic economics. While the price of trades will likely rise more or less in step with the tax, investors will respond by trading less. There are a range of estimates of sensitivity of trading volume to the cost of trading; most research indicates that it is highly responsive.

For simplicity let’s assume that the elasticity is one. This means that if trading costs double, then the volume of trading will be reduced by 50 percent. In this story, investors would end up bearing none of the cost of the tax even if it were passed on in full. The reduction in trading volume would fully offset the higher cost per trade.

In this context it is important to remember that finance is an intermediate good, like trucking. We don’t in general derive pleasure directly from finance like we might with food, entertainment or housing; finance is a means to an end. This means that if we cut our trading in half in response to higher trading costs, this has no obvious negative impact for the economy or society unless it somehow means that we are less secure in our saving or that capital is being less well-directed to its best uses.

It would be difficult to maintain that the innovations of the last three decades have accomplished either of these goals. If investors end up turning over their portfolios less frequently as a result of a transactions tax, it is difficult to see any obvious negative economic effects that would result.

This brings up the final point, that the tax will raise the cost of capital and thereby reduce investment and growth. While some opponents of a tax seem to believe that this is a very potent argument, it is important to remember that the tax rates being discussed would just raise transactions costs back to where they were 10 or 15 years ago.

No one in 1995, or even 1985, felt that the high cost of financial transactions was a serious impediment to economic growth.  Furthermore, one would be hard-pressed to find any economic research that shows that the sharp drop in transactions costs was a major factor propelling growth over the last three decades. If the drop in costs was not an important factor raising growth rates then it is difficult to see how raising transactions costs back to their former levels can have a substantial effect in slowing growth.

It is also important to remember that if trading were reduced roughly in proportion to the rise in transaction costs, then there would be little change in the cost of capital to borrowers. There would be less trading, but total trading costs remain roughly constant, which means that the cost of capital should stay roughly constant.

Of course the revenue from the tax must come from somewhere and in this case it is coming from the rents earned in the financial industry. There will be many fewer employed in the industry as a result of the tax. If this does not prevent the industry from performing its essential role of financial intermediation, then the tax will have effectively made the industry more efficient. This would be comparable to cutting the number of people employed in the trucking industry by a third or a half and still being able to ship products every bit as quickly. Who would not support this?

There will be negative aspects to any tax and a financial transactions tax is no exception. However, when we look at ways to raise large amounts of revenue, either to curtail budget deficits or to support new public services, it is difficult to envision a better route than a financial transactions tax.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy . He also has a blog, ” Beat the Press ,” where he discusses the media’s coverage of economic issues.

This article was originally published by International Relations and Security Network.

Exclusively in the New Print Issue of CounterPunch

THE SLOW DEATH OF THE ROMAN CATHOLIC CHURCH – Nancy Scheper-Hughes on Clerical Sex Abuse and the Vatican. PLUS Fred Gardner on Obama’s Policy on Marijuana and the Reform Leaders’ Misleading Spin.  SUBSCRIBE NOW

Order your subscription today and get
CounterPunch by email for only $35 per year.

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
December 09, 2016
Friday - Sunday
Jeffrey St. Clair
Roaming Charges: Nasty As They Wanna Be
Henry Giroux
Trump’s Second Gilded Age: Overcoming the Rule of Billionaires and Militarists
Andrew Levine
Trump’s Chumps: Victims of the Old Bait and Switch
Chris Welzenbach
The Forgotten Sneak Attack
Lewis Lapham
Hostile Takeover
Joshua Frank
This Week at CounterPunch: More Hollow Smears and Baseless Accusations
Paul Street
The Democrats Do Their Job, Again
Vijay Prashad
The Cuban Revolution: Defying Imperialism From Its Backyard
Michael Hudson - Sharmini Peries
Orwellian Economics
Erin McCarley
American Nazis and the Fight for US History
Mark Ames
The Anonymous Blacklist Promoted by the Washington Post Has Apparent Ties to Ukrainian Fascism and CIA Spying
Yoav Litvin
Resist or Conform: Lessons in Fortitude and Weakness From the Israeli Left
Conn Hallinan
India & Pakistan: the Unthinkable
Andrew Smolski
Third Coast Pillory: Nativism on the Left – A Realer Smith
Joshua Sperber
Trump in the Age of Identity Politics
Brandy Baker
Jill Stein Sees Russia From Her House
Katheryne Schulz
Report from Santiago de Cuba: Celebrating Fidel’s Rebellious Life
Nelson Valdes
Fidel and the Good People
Norman Solomon
McCarthy’s Smiling Ghost: Democrats Point the Finger at Russia
Renee Parsons
The Snowflake Nation and Trump on Immigration
Margaret Kimberley
Black Fear of Trump
Michael J. Sainato
A Pruitt Running Through It: Trump Kills Nearly Useless EPA With Nomination of Oil Industry Hack
Ron Jacobs
Surviving Hate and Death—The AIDS Crisis in 1980s USA
David Swanson
Virginia’s Constitution Needs Improving
Louis Proyect
Narcos and the Story of Colombia’s Unhappiness
Paul Atwood
War Has Been, is, and Will be the American Way of Life…Unless?
John Wight
Syria and the Bodyguard of Lies
Richard Hardigan
Anti-Semitism Awareness Act: Senate Bill Criminalizes Criticism of Israel
Kathy Kelly
See How We Live
David Macaray
Trump Picks his Secretary of Labor. Ho-Hum.
Howard Lisnoff
Interview with a Political Organizer
Yves Engler
BDS and Anti-Semitism
Adam Parsons
Home Truths About the Climate Emergency
Brian Cloughley
The Decline and Fall of Britain
Eamonn Fingleton
U.S. China Policy: Is Obama Schizoid?
Graham Peebles
Worldwide Air Pollution is Making us Ill
Joseph Natoli
Fake News is Subjective?
Andre Vltchek
Tough-Talking Philippine President Duterte
Binoy Kampmark
Total Surveillance: Snooping in the United Kingdom
Guillermo R. Gil
Vivirse la película: Willful Opposition to the Fiscal Control Board in Puerto Rico
Patrick Bond
South Africa’s Junk Credit Rating was Avoided, But at the Cost of Junk Analysis
Clancy Sigal
Investigate the Protesters! A Trial Balloon Filled With Poison Gas
Pierre Labossiere – Margaret Prescod
Human Rights and Alternative Media Delegation Report on Haiti’s Elections
Charles R. Larson
Review:  Helon Habila’s The Chibok Girls: the Boko Haram Kidnappings and Islamist Militancy in Nigeria
David Yearsley
Brahms and the Tears of Britain’s Oppressed
FacebookTwitterGoogle+RedditEmail