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.

 

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.

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
June 23, 2017
Friday - Sunday
Jeffrey St. Clair
Democrats in the Dead Zone
Gary Leupp
Trump, Qatar and the Danger of Total Confusion
Andrew Levine
The “Democracies” We Deserve
Jeffrey St. Clair - Joshua Frank
The FBI’s “Operation Backfire” and the Case of Briana Waters
Joseph G. Ramsey
Savage Calculations: On the Exoneration of Philando Castille’s killer
John Wight
Trump’s Attack on Cuba
Brian Cloughley
Moving Closer to Doom
David Rosen
The Sex Offender: the 21st Century Witch
John Feffer
All Signs Point to Trump’s Coming War With Iran
Jennifer L. Lieberman
What’s Really New About the Gig Economy?
Pete Dolack
Analyzing the Failures of Syriza
Mike Whitney
Putin Tries to Avoid a Wider War With the US
Gregory Barrett
“Realpolitik” in Berlin: Merkel Fawns Over Kissinger
Louis Yako
The Road to Understanding Syria Goes Through Iraq
Graham Peebles
Grenfell Tower: A Disaster Waiting to Happen
Ezra Rosser
The Poverty State of Mind and the State’s Obligations to the Poor
Ron Jacobs
Andrew Jackson and the American Psyche
Pepe Escobar
Fear and Loathing on the Afghan Silk Road
Andre Vltchek
Why I Reject Western Courts and Justice
Lawrence Davidson
On Hidden Cultural Corruptors
REZA FIYOUZAT
Useless Idiots or Useful Collaborators?
Missy Comley Beattie
The Poor Need Not Apply
Joseph Natoli
What to Wonder Now
Thomas Knapp
The Castile Doctrine: Cops Without Consequences
Nyla Ali Khan
Borders Versus Memory
Binoy Kampmark
Death on the Road: Memory in Tim Winton’s Shrine
Sam Pizzigati
Companies Can Either Make Things or Make CEOs Rich
Tony McKenna
The Oily Politics of Unity: Owen Smith as Shadow Northern Ireland Secretary
Nizar Visram
If North Korea Didn’t Exist US Would Create It
Jill Richardson
Trump on Cuba: If Obama Did It, It’s Bad
Olivia Alperstein
Our President’s Word Wars
Clark T. Scott
Parallel in Significance
Richard Klin
Prog Rock: Pomp and Circumstance
Charles R. Larson
Review: Malin Persson Giolito’s “Quicksand”
June 22, 2017
Jason Hirthler
Invisible Empire Beneath the Radar, Above Suspicion
Ken Levy
Sorry, But It’s Entirely the Right’s Fault
John Laforge
Fukushima’s Radiation Will Poison Food “for Decades,” Study Finds
Ann Garrison
Jeremy Corbyn, the Labour Party, and the UK’s Socialist Surge
Phillip Doe
Big Oil in the Rocky Mountain State: the Overwhelming Tawdriness of Government in Colorado
Howard Lisnoff
The Spiritual Death of Ongoing War
Stephen Cooper
Civilized, Constitution-Loving Californians Will Continue Capital Punishment Fight
Bruno Rodríguez Parrilla
Cuba Will Not Bow to Trump’s Threats
Ramzy Baroud
Israel vs. the United Nations: The Nikki Haley Doctrine
Tyler Wilch
The Political Theology of US Drone Warfare
Colin Todhunter
A Grain of Truth: RCEP and the Corporate Hijack of Indian Agriculture
FacebookTwitterGoogle+RedditEmail