Tobin taxes: a bad idea whose time should never come

September 2, 2009

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.

7 comments

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This will hurt the average American who has to dip into his investments to make ends meet in these tough times. Maybe the government should concentrate on creating jobs and wealth in this country instead of distroying it.

I am a loyal democrat who is getting tired of the “class warfare” being waged by the democratic party. I did not become a democrat to hate another person for any reason be it class or race.

Posted by Susan | Report as abusive

This tax would simple destroy the competitiveness of the US capital markets. Other countries, India for example, are eliminating these types of taxes. As the world markets open to the promise of a better day through capitalism, the US closes the door. Every study done on this tax, shows this will cause greater harm than good and will not generate the promised revenues. Hopefully Senators Gillibrand and Schumer realize that this would destroy their state. God save this country

Posted by Dogma | Report as abusive

James,

I just saw you on Kudlow. Great job. I laughed out loud when he brought up the UK as a successful example of this stamp tax. NOBODY pays that tax except mom and pop investors in the UK. EVERY institution remotely associated with the market is exempt placing the burden on the little guy. Some success story!

BTW,
India (who had this dreadful tax) is eliminating it.

http://business.rediff.com/report/2009/a ug/12/new-direct-taxes-code-released.htm

Posted by Mark | Report as abusive

[...] View original here: James Pethokoukis » Blog Archive » Tobin taxes: a bad idea whose … [...]

Let’s have 1% tax on all contributions to unions and political parties.It’s a small tax that wouldn’t hurt common man.

Posted by npnote | Report as abusive

I ALREADY PAY TAXES ON TRADING PROFITS! NOW THEY WANT TO TAX ME EVEN ON LOSING TRADES?!?!?!?!

Posted by Jeff Sanders | Report as abusive

Technically, the purpose of stock exchanges is to raise capital, and a 0.1% charge on that is de minimis compared to the tax extracted by Wall Street and the City.

As you know – but gloss over – the actual principal purpose of the stock market is as a casino, and a transaction tax is no bad thing IMHO. In fact we even have one already in the UK – called Stamp Duty, and it’s no big deal. It doesn’t do much to stifle trading, that’s for sure,and it’s a simple and effective tax. Transparent, easy to collect, and unavoidable.

Neverthless I think that the justification and rationale for a Tobin tax is misconceived since who can say what transactions are speculative? It is not implementable in relation to FX transactions either, I would suggest.

I advocate a transaction tax on gross corporate revenues by way of a limited liability levy, and I would abolish all other corporate taxes. I would also apply a levy to gross revenues from intellectual property protected by copyright or patent whoever owns them.

Both levies – like land value tax – are taxes on rents from unearned privilege, and in my view infinitely preferable to taxes on earned income.

When they introduce this tax for sure I will take all my money out of the market. Already I believe this stock market is just a big Ponzi scheme where 95% of the listed companies are only there to fill their pockets. Start-up biotech companies paying themselves salaries of over a million dollars, many other start-up companies never make a dime and squander billions on salaries and bonuses.

Now they want to punish the little guy who is trading and who already pays taxes over the capital gains. People think 0.1% is small but I can tell you that it is impossible to ever create a trading system that can be profitable. For instance with ES mini futures now around 1000 you will have to pay 0.1% of 50000$ = 50$ on top of the commission of 2.4$. Buying and selling 1 future would cost you 104.8$. Before you will start making money the future has to move 2 points.

So they will force market participants to become “long term investors”. Now, we all know that this is just handing out money to these criminal listed companies who reward themselves outrageously and give nothing in return (in 95% of the cases).

Maybe it is a good thing. Introduce a tax and let this fraudulent system collapse all together. Let these criminal listed companies work for a change. Because I tell you when this tax is introduced I am out and will never come back.

Posted by Ed | Report as abusive