I was on a panel the other day exploring the idea of a financial transaction tax, or an FTT (here’s the video). Much of the discussion focused on the attributes of the idea, riffing off of the bill by Sen Harkin and Rep DeFazio for a small FTT on stock, bond, and derivative trades.
Whaddya mean, small? I mean 0.03%, or three basis points—three one hundredths of a percent, or thirty cents on a $1,000 trade. Small, right? Except for according to the JCT score of the bill, which includes behavioral responses, like diminished trading, it raises $350 billion over ten years, which ain’t exactly nothing.
Here are some of the points I made, but be sure to listen to the other panelists, all of whom were really interesting (I mean it—check them out—they each brought something unique to the table).
–Not only does the FTT exist in many countries—the London exchange has long had one, though its base is limited—but France recently added one and Germany has recently shown strong interest. The more places that have the tax, the less compelling is a central argument of opponents: trades will just go offshore to avoid the tax.
–The tax is likely to reduce trade volatility–some say that’s a good thing but others disagree. I give both sides of the argument in the video (pro: volatility is the enemy of patient capital and productive allocation; con: anything that diminishes trade volumes blunts liquidity, transparency, and price discovery…but listen to Wallace Turbeville on this point).
–The incidence (who bears the burden of the tax) is not well known…as I say, my intuition is it hits high frequency traders (kinda obvious, I know), but there are other options, including consumers of financial services if traders and the exchanges can push the tax forward to them.
–So, potential upsides of the FTT: reduce volatility, improve capital’s patience and productive allocation, perhaps reduce the distorted size of the financial sector (i.e., correct negative externalities), significant revenues.
–Potential downsides: chased trades offshore; some argue the real problem in contemporary financial markets is leverage, which relative to equities, already has favorable tax treatment. The FTT doesn’t scratch this itch, and even exacerbates it (by amplifying the tax advantage on debt financing).
One other point—Wallace Turbeville, a former Goldman VP who’s now a senior fellow at Demos (!)—says something to this effect in his presentation: back around WWII, the average holding period for a stock was four years; in 2000, it was 8 months; in 2008, 2 months; and in 2011, it was 22 seconds. I’m not sure that’s quite right, but he’s definitely on target re the trend.
And as he stresses, it’s hard to believe there’s useful information or productive allocation in much of the high-frequency trading that’s going on today. In fact, it’s a lot easier to believe that there are significant negative externalities engendered by that stuff, and if so, the FTT is one way to internalize them.
Source: Business Insider