Tobin taxes: a bad idea whose time should never come
American unions. Democrats, anti-globalization wreckers and British regulators may love the idea of financial transaction, or Tobin, taxes, but not me. Here is why (some of these points came from a great article by Dan Matthison of Credit Suisse):
1) Even a 0.10 percent tax would double the cost of US stock trading where the average commission cost is just under a dime. Welcome back to the pre-Internet early 1990s.
2) It would reduce market volumes and make the equity market less attractive. Kind of dumb thing to do in a time of constrained credit markets where it is tough to raise money.
3) That supposed $100 billion-$150 billion in revenue wouldn’t appear out of thin air. It would come from investment firms who would pass along costs to customers.
4) It would drive trading activity to less costly trading centers, such as the Toronto Stock Exchange (at least if we are talking about the US). Goodbye US jobs.
5) It is a solution in search of a problem. Trading didn’t cause the financial crisis. What did? As William Beuiter puts it:
The financial sector is too big throughout the overdeveloped world in part because much of it enjoys a free state guarantee against default on its unsecured debt. Retail deposits are explicitly insured, but at premiums that imply a taxpayer subsidy. Other counterparties of banks and other systemically important financial institutions also benefit from implicit default guarantees. The cost of capital to the banking sector is subsidised, causing the sector to be too large.
6) We are already going to raise cap gains taxes here in the US. A Tobin tax seems like piling on given the huge losses folks have suffered in their portfolios.
Bottom line: Tobin taxes were hijacked by anti-globalists (James Tobin himself says so) who view capitalism and the financial sectors as a leeches on the “real” economy and destructive to developing nations. (I wonder if China agrees?) Today, they are pushed by folks who are looking for a way to raise taxes in a politically palatable way. Just like instead of raising healthcare taxes in the US, we might raise taxes on healthcare insurance companies — who would then pass along the costs. Phony.