Sunday, October 16, 2011

Bruce Kasting on a transaction tax


Bruce Krasting warns Dean Baker and the 99%'ers to beware of what they wish for.

Read the post at Zero Hedge, Enlightened Self Interest by Bruce Krasting

Krasting concludes:

I’m half serious and half joking this morning. I’m looking at the TV and all of the OWS stuff that is happening around the world. This is gathering speed very quickly now. Anyone who thinks this is going to go away in a few days is just nuts.

One global response from the “Deciders” to the current protests could be a transaction tax. That would be “popular”. It might just be something that is done as a way of appeasing the crowds. Whatever one thought of the possibility of a transaction tax a month ago, those estimates have to go up today. The bigger the protests, the greater the probability that the tax is implemented.

A transaction tax would be like Prohibition. The Volstead Act just made crooks rich. It cost the government billions in lost revenue. The population came to hate it. It was bad policy that was adopted because of a visible protest movement of that time.

The left side of my brain is with Rogoff. A transaction tax would kill liquidity/capital formation. That would result in a huge spike in volatility. This, in turn, would result in broadly lower equity multiples. The connection between stocks and the economy is too tightly correlated. A very sharp downturn in the economy would have to follow. For these reasons, I’m violently apposed to a transaction tax.

The right side of my brain says, “Bring it on”. I’m confident that I can survive and thrive in that environment. Fortunes were made in the 30’s. What may come will be no different.

I do want to be clear about this. The 99% have been pushing the transaction tax. They may get what they think they want. But in the end it will result in more pain for the 99’ers. The concentration of wealth in America will just get higher and higher up the ladder.

A transaction tax that limits liquidity will not create jobs, it will end up costing the government net tax dollars. But guys like me will do just fine.
Be careful of what you wish for.
Is it the case that "a transaction tax would kill liquidity/capital formation," as Rogoff claims?

Or is the real issue effective demand?

8 comments:

Anonymous said...

I'm reminded of a paper in the Journal of Post Keynesian Economics which points out that, for every real transaction on the world market, there's an average of 5 financial transactions related to it. So a 1% transaction tax would be equivalent to a 5% import/export tariff. The author concluded that international trade would suffer while, for speculative finance, the tax would just be "sand in the wheels." Speculators would simply wait a bit longer for the markets to rise/fall enough to cover the loss.

beowulf said...

A Pigovian tax on the casino economy in order to untax the real economy wouldn't be a bad thing. For one thing it'd tax high frequency robotrading out of existence.

Use the revenue generated by the FTT to permanently cut FICA rates.

Dan Kervick said...

My amateurish instincts tell me that one effect of a transactions tax would be to make capital formation more thoughtful and deliberate, and to encourage investors to take a more committed, proprietary interest in the things they buy. We would have less of a frenetic, ADHD economy; less casino gambling; less flim-flam, and more custodial care and stewardship of capital properties, with more well-considered long-run projects.

Investment banks would place more value in employees who know how to slow down, think, deliberate, gather information, deliberate some more, and get it right. It's like taking away their automatic guns and giving them rifles. They have fewer shots, so they have to improve their marksmanship, aim carefully, conserve their ammo, and make every shot count.

However, I think moving to this kind of economy would be assisted - especially as it is starting up - by more public sector spending to support aggregate demand, and by expanded public investment in long term projects, backed by bonds that provide a secure ROR to those looking for quality, secure investments, and who can't afford a lot of transactions with a constantly evolving portfolio.

Tom Hickey said...

"For one thing it'd tax high frequency robotrading out of existence."

According to Krasting, HFT would go.

Anonymous said...

Why does he write:
One global response from the “Deciders” to the current protests could be a transaction tax. That would be “popular”. It might just be something that is done as a way of appeasing the crowds.

This suggests that protesters are unwittingly pushing for a transactions tax.

I do want to be clear about this. The 99% have been pushing the transaction tax. They may get what they think they want.

Ryan Harris said...

A 1% tax on every trade in your IRA/401K/Individual account will result along with the villains of the day, "the hedge fund managers". But you can be sure that the union pension funds that contribute to politics along with the non-bank banks like PIMCO will be exempt. Congress will set the rules like they always....

beowulf said...

"A 1% tax on every trade in your IRA/401K/Individual account will result along with the villains of the day"

Today's villain of the day must be troll.

Mark Cuban endorsed a FTT yesterday (his other suggestions are worth reading as well).
"Tax The Hell Out Of Wall Street And Give It To Main Street"
http://tinyurl.com/5rfvfyh

Clonal said...

Better than a financial transaction tax, is a change to the pricing mechanism of stocks. You buy and sell the stock as you currently do. However the price you will ultimately buy or sell at will be the average price over the period a half hour before your transaction to a half hour after your transaction. Thus you introduce uncertainty in the pricing mechanism.

The result will kill HFT, reduce the daily volume, and force people to value a stock on its real merits, and to only buy or sell a stock when you must. The stock market will no longer be a roulette table.