James Pethokoukis

Politics and policy from inside Washington

A $150 billion a year financial Tobin tax? Really?

October 12, 2009

The idea of a Tobin tax, a tax on financial transactions, is gaing some mo’ in Congress (via WSJ):

With federal budget deficits soaring, policy makers and other advocates are eyeing the huge sums that could be raised as a way to cover the costs of new initiatives.

Labor unions, in particular the AFL-CIO, have proposed a financial-transactions tax as a way to defray costs of a health-care overhaul. Lawmakers have discussed a similar fee as a way to cover the cost of future financial oversight. Liberal advocates are pushing the tax to pay for new stimulus spending.

Taxing Wall Street’s financial transactions is back on the table. … The left-leaning Economic Policy Institute floated the idea of a national transaction tax that would raise $100 billion to $150 billion a year. The tax, at a rate of 0.1% to 0.25% of the value of the trade, would be levied on all financial transactions such as stock trades, but not on consumer transactions such as with credit cards.

As I wrote last month:

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.

Comments

Some proponents say the purpose of the tax is to shrink the financial sector back to the size of the 1980′s. They admit it will cost investors a “bit” more just like in the 80′s. A researcher found that the average spread in 1986 was $0.53, so that alone will cost the average investor around 2% up front. I would hate to see 90% of financial activity leave the US as it did when Sweden had a transaction tax for only 6 years.

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