Good comments/questions on this post from yesterday, so let me briefly revisit the idea of a financial transaction tax: a small, few basis points tax on the buying and selling of securities.
–Mike points out that “spoofers” place and cancel buy and sell orders, they don’t execute sales, so an FTT wouldn’t stop them. Sloppy writing on my part. My (unstated) thought, as Mitakeet points out, was that to stop spoofing, the FTT would have to apply to orders.
–Leander asks: won’t traders just take their accounts to untaxed exchanges elsewhere? Over to Dean B:
MYTH: Financial transactions are so mobile that an FTT in one country is unenforceable and will simply result in trading moving overseas.
FACT: The European Union recently voted to implement the FTT in at least 11 member nations, which likely will go into effect in 2014.* With so many European, as well as several Asian, trading floors soon to be or already operating with the tax, there’s little chance that trading will move overseas as a result of passing it in the U.S. In addition, the U.K. has had a tax on stock trades for centuries, throughout periods when the U.K.’s volume of trading has grown robustly. It raises over 3 billion pounds per year, which would be the equivalent of over $30 billion in an economy the size of the U.S.
*delayed until 2016, so not clear where this ultimately lands. It would be better to jump together on an FTT, but as Dean suggests, a small enough tax may not generate much movement. There are risks and costs to trading on unfamiliar exchanges, including fees that work the same way as the FTT would.
–Chuck points out that there are a lot of corporations that are engaged in aggressive tax avoidance. If we want revenues, why not go after them?
Agree! I like to make the point that for every $1 we provide to IRS enforcement, they can collect $6 owed (I’m conflating tax avoidance and tax evasion here a bit…see the link Chuck provided; the avoidance stuff is legal…ugh). But the FTT has the added, Pigouvian benefits noted in the piece.
–Pete says regulate, don’t tax. My point in the piece was that the tax is a cleaner, more reliable way to go after HFT. The quant jocks live to workaround regulations. As for Pete’s hand-wringing about the incidence of the tax, remember, we’re talking a few basis points! I’d settle for a very small FTT–<5 bps–which for your average trader is not nearly the big deal Pete says it is.
Let’s keep this conversation going…the more I think about this, the more I wonder if its time has come!