Saturday, November 27, 2010

Great Minds Think Alike

I am constantly disappointed to find that what I thought were my own original ideas have already been deeply explored by other, far more expert, minds. If the experience were not so frequent, I might even be surprised. Oh, well... if I am not being original, I can take solace that at least I am on the right track.

In the linked paper below, Dean Baker, co-Director of the progressive think-tank Center for Economic and Policy Research in Washington, DC., discusses the concept of a Financial Transaction Tax (FTT), an idea I had been mulling over since the first causes of the Great Financial Meltdown of 2008 began coming to light. I must have not been paying attention at the time, but apparently there was even some consideration given to doing just that in policy circles around the globe, as recently as November 2009. It was short-lived, apparently beaten back by the special interest lobbyists on the payroll of Goldman Sachs, JP Morgan et al, at least for the time being. I am hopeful the idea will be resurrected soon, perhaps once we begin once again tackling comprehensive tax reform?

An FTT is essentially a sales tax on financial asset transactions. The idea is to impose a very small tax on trades of [virtually all] types of financial instruments - stocks, bonds, mortgage- & other asset-backed securities, mutual funds, exchange-traded funds (ETFs) & notes (ETNs), commodity-/currency-/index-contracts, options, futures, forwards, interest rate swaps, credit default swaps and all the other kinds of derivatives & other infinite varieties of complex Wall Street financial instruments - for a number of potentially useful reasons:
  1. To discourage the kinds of excessive and socially useless speculation that resulted in the recent cases of "irrational exuberance" in various markets (e.g., the tech stock bubble of the late '90s ~ early '00s; the housing bubble of the mid '00s), which, in turn, ended in burst asset bubbles that nearly caused the collapse of the global financial system, which, in turn, exacerbated the Great Recession of 2007-09, generated severe unemployment & continues to threaten deflation;
  2. To broaden and deepen the tax base and thereby (arguably) increase "fairness" of the distribution of the overall tax burden;
  3. To provide additional sources of revenues to the government to reduce deficits & the national debt, and/or to provide funding for a kind of social insurance program to protect from the impacts of potential future dislocations from speculative asset bubble bursts.
[Not to mention that there is a certain sense of sweet, ironic justice to imposing such a tax on the sector that is largely responsible for our current difficult state of affairs... especially one that benefited so greatly from government's willingness to use public funds to stave off their self-induced imminent demise.]

FTTs are not a new idea. As Baker writes:
There has been a long historical experience with FTTs in both the United States and around the
world. Substantial transactions taxes were imposed in most financial markets until the last two decades, when political pressure from the financial sector, coupled with the threat from increased global competition, led most countries to substantially reduce or eliminate their taxes {my emphasis added}. Nonetheless, many taxes still remain in place, most notably the 0.5 percent stamp tax imposed on each trade on the London stock exchange. This tax raises more 4 billion pounds annually, the equivalent of almost $40 billion in the U.S. economy.
Somehow, despite The Who's anthemic assurance that "We Won't Get Fooled Again", the financial industry pulled the wool over our leader's eyes - no doubt through a toxic combination of unsubstantiated fear-mongering assertions about the loss of global competitiveness and a steady, mountainous stream of campaign contributions. When will we learn?

Of, course, I don't pretend that there are not problems to overcome with this basic idea, nor that such a tax is sufficient, on its own, to address all of the issues that lay at the root of our current economic mess.
But, it's a start.

financial-transactions-tax-2008-12.pdf (application/pdf Object): "- Sent using Google Toolbar"

Baker's paper highlights a number of areas that require aggressive research:

1. As Baker notes, whether an FTT is efficiency-enhancing is arguable. Mark Thoma, in his Economist's View blog posting of Sept. 2, 2009, sums it up succinctly:
The efficiency properties of the tax depend upon how speculation is viewed. If you believe speculation is efficiency enhancing, and it can be, then reducing speculation would reduce rather than increase efficiency. But if you believe speculation is destabilizing, and it can be this too, then reducing speculation would be beneficial. I am not as negative toward speculation as many, and believe that while it can be both good and bad from a market efficiency perspective, on net, it does good. A general tax would reduce both the good and bad types of speculation, so it is not clear to me that this would be beneficial. I would prefer a mechanism that targets that bad speculation, but leaves the good type alone, but since it is difficult to tell the two apart, even ex-post, it is not practical to levy a tax on just the bad transactions while giving the good ones a free pass.
Hmmm... cause for pause, but hardly rigorous or convincing research. I would like to see something more thorough than a couple of sentences of gut-level thought experiments before conceding on the premise.


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