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Tiny Tax Would Make a Big Difference
Center for Economic and Policy Research / Research
Published: Wednesday 8 August 2012
“Whatever hardships befall the victims of such occasional mischief, it’s not clear that we should be any happier when the programs are working as planned.”
The Knight Capital debacle last week gave us yet another example of the financial system run amok. The company’s computers were apparently misprogrammed. As a result, they caused wild gyrations in the price of several major stocks. This incident naturally brings back memories of the “flash crash” two years ago, when programmed trading sent stock prices plummeting by close to 10 percent for no reason whatsoever. In the era of high-speed trading, it seems that such events are inevitable.
Whatever hardships befall the victims of such occasional mischief, it’s not clear that we should be any happier when the programs are working as planned. After all, many of these programs are designed to pick up large trades and effectively jump in ahead of the trader.
For example, if a major investor or mutual fund was in the process of selling a large amount of G.E. stock, a high-speed program may detect the movement. The high-speed trader could then short G.E. stock and buy it back immediately after the big sale and get a guaranteed profit. This has the same effect on the stock market as insider trading. Insider trading is bad for markets because it means that normal investors will get a smaller share of the gains. The same holds true with the high-speed trading platforms that now dominate the market.
A modest financial speculation tax can go a long way to putting an end to such practices and bringing the markets back to earth. It can also raise large amounts of money. A bill proposed by Senator Tom Harkin and Representative Peter DeFazio would impose a tax of just 0.03 percent on trades. According to the Joint Tax Committee of Congress, it would raise more than $350 billion in its first nine years. A set of taxes more in line with the 0.5 percent tax that the United Kingdom imposes on stock trades could raise more than $1.5 trillion over the next decade.
Even the higher set of taxes would raise the cost of transactions only back to their early 1990s levels. And the United States already had very liquid financial markets by 1990. In short, a financial speculation tax is a great way to raise lots of government revenue by making financial markets better serve their purpose of transferring capital from savers to investors.
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ABOUT Dean Baker
Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is the author of several books, including Plunder & Blunder: The Rise and Fall of the Bubble Economy, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and The United States Since 1980. He was the editor of Getting Prices Right: The Debate Over the Consumer Price Index, which was a winner of a Choice Book Award as one of the outstanding academic books of the year. He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio. His blog, Beat the Press, features commentary on economic reporting. He received his B.A. from Swarthmore College and his Ph.D. in economics from the University of Michigan.
5 comments on "Tiny Tax Would Make a Big Difference"
August 08, 2012 6:07pm
I might not be seeing this right, but don't all these trades go for clients. If this is the case the traders will simly pass on the tax to their clients. This doesn't correct the problem at hand. The hedge fund managers and big traders of other peoples money earn millions and billions of dollars /year. In order to correct the inequality of income gap, Congress has to change the Tax Code to what we had in the past. We used to have top marginal rates of 79%, and 91%. We used to have 33 Tax Brackets in order to cover all ranges of income. This is what we need today. "20 Brackets to $20Million, and a top rate of 60%, would do more for this country than anything that anyone else could think of.
August 08, 2012 2:17pm
It is amazing what a small tax can accomplish. It can turn the wall st. wolves into bleating sheeop. They say BAAH! NAAH! Scum bags.
August 08, 2012 1:32pm
In addition, let's it be shared by the brokers AND the investors.
August 08, 2012 1:31pm
Good idea!
August 08, 2012 11:13am
A timid move by Congress who seeks modest favor from there constituents but doesn't want to incur the wrath of the Wall Street power brokers who have had a leash on our government for over a century. New York state already has a transaction tax on the books that the local government almost immediately after it’s passage turned into an automatic tax refund for the markets who threatened to move across the river to New Jersey. Considering we have a society in the midst of total financial collapse, anything less than a 1% national transaction tax is a waste of time. Where are they going to move when it’s a national law, the Bahamas where many of the former U.S. Corporations moved to avoid paying any taxes ? We are invading the wrong foreign countries !