FacebookTwitterGoogle+RedditEmail

The Specious Case Against a Financial Transactions Tax

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.

 

More articles by:

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.

April 23, 2018
Patrick Cockburn
In Middle East Wars It Pays to be Skeptical
Thomas Knapp
Just When You Thought “Russiagate” Couldn’t Get Any Sillier …
Gregory Barrett
The Moral Mask
Robert Hunziker
Chemical Madness!
David Swanson
Senator Tim Kaine’s Brief Run-In With the Law
Dave Lindorff
Starbucks Has a Racism Problem
Uri Avnery
The Great Day
Nyla Ali Khan
Girls Reduced to Being Repositories of Communal and Religious Identities in Kashmir
Ted Rall
Stop Letting Trump Distract You From Your Wants and Needs
Steve Klinger
The Cautionary Tale of Donald J. Trump
Kevin Zeese - Margaret Flowers
Conflict Over the Future of the Planet
Cesar Chelala
Gideon Levy: A Voice of Sanity from Israel
Weekend Edition
April 20, 2018
Friday - Sunday
Paul Street
Ruling Class Operatives Say the Darndest Things: On Devils Known and Not
Conn Hallinan
The Great Game Comes to Syria
Jeffrey St. Clair
Roaming Charges: Mother of War
Andrew Levine
“How Come?” Questions
Doug Noble
A Tale of Two Atrocities: Douma and Gaza
Kenneth Surin
The Blight of Ukania
Howard Lisnoff
How James Comey Became the Strange New Hero of the Liberals
William Blum
Anti-Empire Report: Unseen Persons
Lawrence Davidson
Missiles Over Damascus
Patrick Cockburn
The Plight of the Yazidi of Afrin
Pete Dolack
Fooled Again? Trump Trade Policy Elevates Corporate Power
Stan Cox
For Climate Mobilization, Look to 1960s Vietnam Before Turning to 1940s America
William Hawes
Global Weirding
Dan Glazebrook
World War is Still in the Cards
Nick Pemberton
In Defense of Cardi B: Beyond Bourgeois PC Culture
Ishmael Reed
Hollywood’s Last Days?
Peter Certo
There Was Nothing Humanitarian About Our Strikes on Syria
Dean Baker
China’s “Currency Devaluation Game”
Ann Garrison
Why Don’t We All Vote to Commit International Crimes?
LEJ Rachell
The Baddest Black Power Artist You Never Heard Of
Lawrence Ware
All Hell Broke Out in Oklahoma
Franklin Lamb
Tehran’s Syria: Lebanon Colonization Project is Collapsing
Donny Swanson
Janus v. AFSCME: What’s It All About?
Will Podmore
Brexit and the Windrush Britons
Brian Saady
Boehner’s Marijuana Lobbying is Symptomatic of Special-Interest Problem
Julian Vigo
Google’s Delisting and Censorship of Information
Patrick Walker
Political Dynamite: Poor People’s Campaign and the Movement for a People’s Party
Fred Gardner
Medical Board to MDs: Emphasize Dangers of Marijuana
Rob Seimetz
We Must Stand In Solidarity With Eric Reid
Missy Comley Beattie
Remembering Barbara Bush
Wim Laven
Teaching Peace in a Time of Hate
Thomas Knapp
Freedom is Winning in the Encryption Arms Race
Mir Alikhan
There Won’t be Peace in Afghanistan Until There’s Peace in Kashmir
FacebookTwitterGoogle+RedditEmail