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January 13, 2009

Domestic Tobin Tax - Tax on Financial Transactions

An op-ed in the New York Times on Monday by Bob Herbert, "Where the Money Is," advocates a tax on financial transactions.  Such a tax would function similarly to proposed Tobin taxes on international flows of capital (See Amy Youngblood Avitable, Saving the World One Currency at a Time: Implementing the Tobin Tax, 80 Wash U. L.Q. 391 (2002)).  It would reward long-term investors and serve as a disincentive on short-term investment strategies because the tax would pay a big role for those seeking wealth from small swings but would have less of an impact on value investors not looking to flip stocks hourly. 

Personally, I am instinctively in favor of such taxes because they would seem to encourage productive investment and prevent skimming by the few looking at market ticks rather than at value.  Moreover, arguably such a tax would help smooth markets and pressure the financial service industry to focus more on due diligence related to prospective investment possibilities, rather than pushing the best and brightest to focus entirely on statistical stock tendencies.  Given that in theory every tax has distortionary effects (on market transactions, labor incentives, investment decisions), this one seems relatively good. 

I spoke with a friend in the finance sector who offered a number of reasons to oppose such a tax.  If short-term investors systematically are counter-cyclical, such a tax could make the market highs and lows go on for longer than they should.  Short-term investments should not be punished according to this view because they work against market fluctuations; the counter-cyclical liquidity provided by such investments justifies their skimmed profits. Through such counter-cyclical activity, they also protect other investors or market players against narrow, short-term sell/buy pressures (an example discussed in one blog that gives a sense of the positive role of such liquidity is that of municipal bonds, click here for the example). 

To justify our concern with these topics in a Poverty Law Blog, let me just note that one of Roberto M. Unger's proposals is to link capital liberation with worker liberation, where loosening limits on capital should go hand in hand, and require, simultaneous labor market liberation across nation state borders. 

-Not an easy call, but a proposal I think worthy of attention as the country looks for ways to pay for our upcoming spending.  E.R. erosser@wcl.american.edu

January 13, 2009 in Current Affairs | Permalink

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Comments

Traders provide liquidity to the markets. Basically, they are market makers. Without liquidity, who will buy all those millions of shares of stock when the mutual fund that has YOUR money tries to sell the stock? Not only will all investors (401K accounts) lose money from this tax, but they will also lose even more money as stocks will drop significantly more when investors want to sell but there are few buyers.

Not only that, but with the Madoff scandal in December, many investors already don't trust nor want to invest in the markets. This tax would only make this worse. U.S. more than any other country relies on capital.

How many jobs were lost in the last four months of last year? Do you know how many jobs would be affected when hundreds of thousands of traders suddenly stopped trading?

What about hedge funds? They are speculators, but they also invest for longer term. Hedge funds would go out of business overnight. Wealthy americans have huge investments in hedge funds.

It's a shame that some people are not able to gauge risk vs. reward. Is $100 billion per year really worth potentially large market disruption, in addition to job losses, and investment capital leaving U.S. markets?

Why not just raise short term capital gains tax? Traders would have to pay more taxes, but they would still provide liquidity and would not be standing in unemployment lines.

Posted by: Dr. Evil | Jan 18, 2009 12:53:54 PM

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