FTT redux

April 23rd, 2015 at 9:22 am

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!

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33 comments in reply to "FTT redux"

  1. Pete Davidson says:

    You want an FTT to apply to orders placed even if they are not executed to stop spoofing?
    what the heck?
    Taxing people to get involved with the stock market?
    what the heck?

    Why are you going after everything single person in America just for the registered professionals who engage in HFT?

    Go after just those who are registered professionals if you must.
    But leave regular America alone.
    You surely cant justify an HFT tax on IRA & 401k contributions into the stock market.
    Lets ENCOURAGE those transactions, not penalize them with a tax.


    • Ralph Hartley says:

      As applied to ordinary investors, a tax on orders is no worse than a tax on completed transactions, because a large fraction orders from ordinary investors *are* executed.

      But a vast majority of bids by spoofers and high frequency traders are never executed, so a tax on bids would cost them more.

      A 1bps tax on bids would affect them more than a 5bps tax on sales, but would have a much smaller effect on ordinary trading.


    • Kevin Rica says:

      Pete,

      If you buy and hold, the FTT won’t be more than a tiny fraction of a decimal point of your returns. The management fees you pay your broker will be far more.

      Since a lot of the high-speed trading is intended to harvest the economic rents that might otherwise be randomly distributed to ordinary investors, ordinary investors might actually come out ahead.


      • Pete Davidson says:

        Why open the door AT ALL to taxing IRA & 401K accounts????
        You know darn well they have ****NOTHING**** to do with high speed trading.

        To both you & Jared, give me logic FOR taxing peoples IRA & 401K accounts with a FTT?
        You can also add College 529 Tuition Savings Plans as well. You really want to slap an FTT on them too?

        Taxing teachers, plumbers, retail workers, and the rest of Main Street in their retirement accounts and college tuition plans is flat out wrong. There is NO justification for it. EVERY “small” tax can rise once implement. Why implement it AT ALL on those accounts?


        • Smith says:

          Really? .5% is too much tax for you? The tax break that is already allowed is really a special regressive measure for the middle class. Lower income earners are unfortunately unable to save a few thousand a year, so the already 15% to 25% middle income tax break savers make use of does no good. It affects upper incomes less because they readily surpass the ceilings on the program, which fortunately keeps some progressivity.

          Thanks for highlighting this inequity. What we should do is eliminate all those tax benefits for which a .5% FTT would take away 1/30th (actually less due to compounding effects). Whatever additional revenue resulted could then be used to expand Social Security benefits for everyone (which is universal and not need based, not progressive, but at least not regressive).

          As my father would say, you want something to cry about? I’ll give you something to cry about.

          http://www.ssa.gov/news/press/basicfact.html
          34% of the workforce has no savings set aside specifically for retirement.


        • Kevin Rica says:

          Pete,

          Since IRAs and 401Ks have NOTHING to do with high-speed trading, they will be protected from the predations of the high-speed traders (See Michel Lewis’ Flash Boys).

          I trade in my IRA every third year. When I make a rare trade (generally less than $2000), it often costs me $25-$40. More often, I pay the brokerage a fee for not trading. On the other hand, 5bp on a $2000 trade is $1 (every third year). The fees are a bigger problem.

          Almost all the tax would fall on the financial industry.

          But Pete, thanks for the preview of how the financial industry will fight back by raising the bogus claim that the FTT will hit IRA and 401K accounts.

          Any carve out for widows and orphans on 401Ks will soon be stretched and excepted by the financial industry and their lawyers and lobbyists until it only applies to food stamps (which will be the only thing classified as a government bond under the rules written by the banking industry).


          • Pete Davidson says:

            I am a plumber & my wife is a teacher. I am not in the financial industry.

            You still havent given 1 reason WHY a new tax on 401K & IRA accounts is necessary.

            I dont care what the size of the tax is now. It can certainly grow.

            401k & IRA accounts have ***NOTHING*** to do with high frequency trading.

            It is very easy to exclude them from any tax.

            Why do YOU have a big push to tax them when those accounts & their owners are doing no wrong now or in the past?


          • Smith says:

            The median household income of $50,000 pays 10% to 15% income tax, plus 6.2% social security, plus 1.45% medicare. That’s about 20%. In reality it’s nearer 30% because the employer social security and medicare tax of 6.2% and 1.45% is actually a tax on the employee’s wages. Again, you’re saving 20% to 30% and worried about .5%?

            The bigger question raised is does a .5% inhibit investor’s ability to make money?
            Will hurt market liquidity, ability to buy and sell stocks, meaning find people willing to buy or sell?
            If yes, will that suppress prices, and consequently ability to raise new capital?

            The object of capital markets is not to aid speculators, but to provide a market so investors in new capital are assured they can cash out when the money is needed.

            But the answer to the first three questions is yes, especially if the rate applied is .5% This is a feature, not a bug. That should stop HFT cold in it’s tracks, but also have a salutary effect on capital markets, calming them, and focusing more attention on their true purpose, pooling investment and risk for going concerns. Currently all that matters is the ability to goose the stock price and then cash out, with short term benefits at a premium, companies needn’t invest in employees, R & D, or ever consider the long term health of the overall economy.


          • Kevin Rica says:

            “Pete the Plumber?”

            That is sooo last election cycle!

            Couldn’t you guys come up with a fresher approach?


        • Jon Marcus says:

          Pete, how do you distinguish between IRAs/401(k)s and other types of accounts? In a way that can’t be gamed by experts who live their lives coming up with ways to game the system?

          I feel sure that if your carve-out was announced, there’d be a flood of new “retirement accounts” specializing in HFT.


          • Jon Marcus says:

            And you’re already paying a stiff price for HFT. “Flash boy” profits aren’t just manufactured out of thin air. They come out of the pockets of other traders, mainly mom & pop retail investors like you and me. I’d glady pay a few basis points to stop those SOBs fleecing us.


        • jonas says:

          Mostly because the regular people you claim to speak for will pay pennies/hundreds for increased stability and transparency in the markets to which they trust their savings. And if that results in increased returns on the order of dollars/hundreds, those who are not shills for bankers and other assorted plutocrats will be happy to have a the net gain. I know that the regular person typing this would be, quite frankly, thrilled.


    • Dausuul says:

      We are talking about a tax of 0.03%. That’s three-hundredths of a percent. If you order $10,000 of stock, you will pay $3 tax.

      But if it bothers you so much that people are getting taxed 0.03% on contributions to their retirement accounts, let’s take the proceeds and use them to fund an expansion of Social Security.


  2. Kevin Rica says:

    More important, we need to make sure that cross-border transactions are all properly taxed. Everyone gets a 1099 and pays. We should not assume that foreign holdings of US assets will be taxed in their home countries until the home country confirms that all taxes have been collected there – then any over collections can be refunded. If that results in odd instances of double taxation, that is much less worrisome than massive occurrence of useless cross-border transactions intended to evade or avoid any taxation. Not much value added is created in the Cayman Islands.


  3. Robert Salzberg says:

    Tax Wall Street to rebuild every street.(and water system, power grid, bridge, levee, dam…)

    If you really want to pass a FTT, you should have a proposal about what to do with the money. We needed additional dedicated funding for infrastructure. Since finance broke America, why not charge them for the cleanup?


    • Pete Davidson says:

      People saving for retirement in 401k & IRA accounts are NOT Wall Street.
      Yet you want to tax them?

      People saving for college tuition in 529 Saving Plans are NOT Wall Street.
      Yet you want to tax them too?

      This thing of taxing everybody in sight is like a duck hunter shooting his gun, spinning around & shooting everything in sight, including the people around him.

      Dont hit those with retirement & college tuition savings accounts with a tax for pete sakes. Taking their money? For what? What did they do?


      • Robert Salzberg says:

        Get a grip Pete. I’m a retail investor and also an active trader. The 0.1% tax I’m proposing is a rounding error that won’t be noticed for normal low level retail investors. Of course, mom and pop investors aren’t Wall Street but compared to the 1.5% to 2.5% transactions tax they pay on average for all credit card charges, this is a drop in the bucket. (The retailer pays the transactions charge but in the end, the customer pays the tab.)


      • Smith says:

        http://en.wikipedia.org/wiki/Financial_transaction_tax#United_States
        Evidently, the U.S. had a FTT of .04% from 1932 to 1966, and stocks did very well.
        Even an active trader doing ten trades a day covering his entire portfolio, this comes to 1.46%
        Considering the market averages 10% or better in all but short 5 year span bear markets, even the 1.46% is acceptable.


  4. Duped says:

    I think it is worth trying. I don’t know what the overall effect will be, and I’m not sure anyone else does either. Again, my concern is that anything involving fixed costs tends to shift the power to the rich risk takers. But I don’t know if this applies in this case.

    Perhaps there should be more than just the tax itself. I have no objections to the tax, but I also believe there has to be a limit on the frequency of trades. That is all. A limit on trades. What, 2 per day on the same stock? The problem there is that the trades will be routed between cooperating but separate entities, but that structure can be threatened with severe jail sentences.

    Just another set of random thoughts. Hope it helps a little.


    • Duped says:

      I think something might not be commonly understood by observers.

      That is, the allowed frequency of trades plays a fundamental part in the algorithms created by the traders. They create their algorithms based upon what is allowed.

      How do I know this? Intuition. It is what I’d do if I was playing that game. I’ve never played that game, but I can imagine, quite easily, the best way to play that game for those who deem it worth while. I deem it a liability upon society, so I don’t use my intuitions and intelligence that way.

      Reduce the number of trades per day and you change everything. Everything, from a perspective of algorithms.


    • Jared Bernstein says:

      It does! (Help a little…)


  5. Robert Salzberg says:

    When you look at the macro for rising inequality over the past few decades, the share of profits going to labor has declined and the profit going to finance have increased. A FTT could reverse some of that.

    The International Labour Organization has a detailed report on what’s responsible for the declines in global labor’s income, here’s a highlight from p.51:

    ” Figure 38(a) shows that in the case of developed economies all factors contributed to the fall in the labour income share over time, with global financialization playing the largest role. The estimates mean that, in terms of relative contribution, global financialization contributes 46 per cent of the fall in labour income shares, compared to contributions of 19 per cent by globalization, 10 per cent by technology and 25 per cent by changes in two broad institutional variables: government consumption and union density. These results open up the possibility that the impact of finance may have been underestimated in many of the previous studies and suggest that overlooking the role of financial markets may have serious implications for our understanding of the causes of labour share trends.”

    http://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_194843.pdf


    • Smith says:

      Krugman has weighed in on this repeatedly, though without tying it to share of profits to labor. The percent of the economy generated by finance rose precipitously.
      Here’s an interesting take on the argument with links to original Krugman blogs, many more where that came from:
      http://economicsofcontempt.blogspot.com/2009/03/is-financial-sector-too-big.html


      • Robert Salzberg says:

        Krugman did cite the same ILO report in 2013 and discuss that the new problem is that the share of profits has shifted from labor to capital:

        http://www.nytimes.com/2013/06/14/opinion/krugman-sympathy-for-the-luddites.html


        • Robert Salzberg says:

          Here’s part of Krugman’s conclusion in Sympathy for the Luddites:

          ” And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income.”

          FTT here we come. Why not have a FTT dedicated to infrastructure?


        • Smith says:

          Krugman, an economist and columnist I much admire, is often times blind to the obvious.
          He writes:
          “I can already hear conservatives shouting about the evils of “redistribution.” But what, exactly, would they propose instead?”
          ( the closing line from the link you cited http://www.nytimes.com/2013/06/14/opinion/krugman-sympathy-for-the-luddites.html )
          There are so many proposals to make, obviously not coming from conservatives, but Krugman’s “redistribution” idea is dead wrong, and appears to come from intellectual laziness, disdain and unfamiliarity with labor issues. He is correct that education is not the answer to inequality, and that Greece suffered due to DNWR (downwardly nominal wage rigidities) making wage adjustments slow and painful. And yet…

          Proposals? There are whole books:
          http://www.amazon.com/Were-You-Born-Wrong-Continent/dp/1595587063
          (Geoghegan has a new one out but I haven’t read it yet)
          http://www.amazon.com/A-Fighting-Chance-Elizabeth-Warren/dp/1627790527
          (Warren’s autobiography is filled with policy proposals, more specific than Stiglitz in “Price of Inequality” though he also has a new book out)
          And don’t forget Piketty, whose confiscatory income tax rate recommendations are more about curbing excessive pay than raising money, let alone redistribution.

          I favor taxing the rich and increasing some spending on things like infrastructure, education, childcare, research and development.

          But the solution to inequality is restoring power to labor and empowering employees to bargain with employers, and taxing the super rich out of existence. It is not to rely on direct government transfers, or middle class tax cuts, which gives bureaucrats and politicians more control over our lives and starves middle class needs respectively. Pass a law that says you can’t make me work for 50 hours and pay me for 40. End the two tier system where 10% lack full labor rights (immigrants, high and low skills). Stop pay discrimination for 40% of the workforce (female).
          Those are basic proposals not involving redistribution, many more. It’s scary instead to read of the fancy sounding but fake “secular stagnation” instead. Bubbles don’t produce inflation when people are borrowing to pay for borrowing.


  6. Jill SH says:

    Guys– guys– Listen:

    The financial markets shenanigans — lots of money chasing money — is what brought on the Great Recession. Supposedly we can’t touch them tax-wise because they’re the “job creators.” Well, I think there’s a big difference between a techie guy who has a great idea for making, say, high quality microphones and recording systems, and building his factory in a former milltown employing a couple dozen people, and techie guy who knows how to build an algorithm for trading on financial markets and skimming lots and lots of money.

    Most of the taxes we pay are percentage taxes at the point of an economic transaction. We are all used to paying a sales tax when we buy a new TV or sofa or dinner out. We all assume a payroll tax out of our paycheck. There’s the gas tax at the pump. Business and corporate taxes are based on the profitability of the business activity. (Property taxes, especially residential, are a stark exception which I won’t go into here.)

    So let’s look at the FTT as a sales tax. There’s a massive amount of money moving around, the tax rate is soooo small as to be barely noticeable (not like the sales tax at the mall), and it will raise a sh**load of money. If we tax where the money is (or is moving), then we can tax at a low rate and still have substantial revenue.

    If you want to see the corporate tax rate go down, then let’s tax the (non-job-creators) financial types for chasing money, and give the break to those investing in real economic expansion. The former will still make lots of money.

    And as someone who has a couple of IRA accounts and is retiring soon, I have no problem with an FTT. Especially if it helps forestall another great recession due to Wall Street run wild. That 2009 drop in value was almost a heart stopper.


  7. Steve Zorowitz says:

    The answer is a very small FTT on trades (with a standard daily exemption, so as not to hurt investors or small traders) and a larger FTT on cancellations (over some daily limit).


  8. Robert Salzberg says:

    Where’s the FTT in the TPP? If international agreements are good for anything, it’s leveling the playing field. Wouldn’t an international FTT do just that? While were at it, why not set a corporate tax rate worldwide which would eliminate all tax havens? Where’s the section of the TPP on that?

    Because the U.S. is such a big player, we could lead the way by legislating that all trades of U.S. companies include a FTT no matter what country the exchange occurs in. That’s trade policy for the 21st Century.


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