Paul L. Caron

Saturday, February 9, 2013

NY Times: Time to Revive the Financial Transactions Tax

NY Times DealBookNew York Times DealBook:  Time to Revive the Financial Transactions Tax, by Jesse Eisinger (ProPublica):

The unwritten rule of Washington debates about taxing and spending is to never consider anything new. But wouldn’t it be wonderful if the pressure of the next few months’ debate changed that?

Last month, 11 European countries, including France and Germany, moved forward on introducing a minuscule taxon trades in stocks, bonds and derivatives. The tax goes by many names. It’s often called a Tobin tax, after the economist James Tobin. In Europe it goes by the more pedestrian financial transaction tax. In Britain, it goes by the wonderful Robin Hood tax, and is supported in an often clever campaign.

On this side of the Atlantic, there is a ghostly silence on a transaction tax in respectable political quarters. But that might change. This month, Senator Tom Harkin, Democrat of Iowa, and Representative Peter DeFazio, Democrat of Oregon, plan to reintroduce their bill calling for just such a tax.

A transaction tax could raise a huge amount of money and cause less pain than many alternatives. It could offset the need for cuts to the social safety net or tax increases that damage consumer demand. How huge a sum? Mr. Harkin and Mr. DeFazio got an estimate from the bipartisan Joint Committee on Taxation, which scores tax plans. It’s a hearty one: $352 billion over 10 years.

The money would come from a tiny levy. The bill calls for a three-basis-point charge on most trades. A basis point is one-hundredth of a percentage point. So it amounts to 3 cents on every $100 traded. ... If some kind of increase in taxes is inevitable, one that takes aim at high-frequency traders probably hits few Iowans and average Americans in general, while doing much good.

(Hat Tip: Mike Talbert.)

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> the tax is almost certainly highly progressive. If so, substituting a Tobin tax for any other alternative almost certainly increases aggregate welfare.

Since when does telling almost everyone "rich people will pay for it" increase aggregate welfare?

Killing the work ethic decreases aggregate welfare, as did "incentivizing" single parent families.

Posted by: Andy Freeman | Feb 11, 2013 11:17:56 AM

Mr. Thorpe, you are assuming no behavioral response to the tax. The tax would eliminate all arbitrage transactions with a pricing difference less than or equal to the tax. If pricing differences are normally distributed, it's likely that only a small portion of that $5.5 quadrillion of transactions would survive the tax.

Don't get me wrong: The efficiency costs of a Tobin tax are extremely small, and the tax is almost certainly highly progressive. If so, substituting a Tobin tax for any other alternative almost certainly increases aggregate welfare. I am merely cautioning against counting tax revenues before they are collected.

Posted by: Theodore Seto | Feb 10, 2013 9:49:00 AM

You might be interested to know that the level of financial transactions in the US. According to my calculations ( , based on Figures from the Bank for International Settlements, the DTCC and CME group, the total for 2011 was around $5.5 Quadrillion. That's more than 2000 times the total tax revenue for the US.

It follows that a global tax on all electronic transactions of as little as 0.05% would allow ALL other forms of taxation to be scrapped completely. Imagine - no income tax, no taxes on company profits, no sales taxes....

Posted by: SImon Thorpe | Feb 10, 2013 1:46:23 AM