This video has been going around (HT - Robert Murphy). If it looks appealing to you, it's a little misleading in a couple ways. First, although the transactions tax seems low, you've got to remember that the volume of transactions that goes on is many multiples of the actual size of the economy, so a 0.05% tax on a transaction is a lot bigger than a 0.05% tax on income.
The virtue of these sorts of ideas is that we think that some speculative activities can impose large costs on innocent bystanders (anyone remember 2008?). If you tax it you get less of it and you reduce the likelihood of a crisis. The problem is there's lots of good speculative activity too - informed speculation on the future prices of assets helps us make reliable decisions about the future. I've got two hypotheses that I think are likely to be true but I don't know for sure: (1.) the volume of responsible speculation is usually a lot bigger than the volume of irresponsible speculation, and (2.) the profits earned on responsible speculation are a lot smaller than the profits earned from irresponsible speculation. That suggests this sort of tax would do a lot more to discourage good speculation than bad speculation.
We can talk about transaction taxes or "Robin Hood Taxes" again when we figure out how to only tax bad sorts of speculation (this is a dismissal of the idea - not an encouragement for politicians to go around deciding what is and isn't responsible!).
I'm not saying taxing the well off to help the worse off is a bad idea. It's a great idea. It's just not clear this is the way to do it.
Not sure about your second hypothesis. (At the least, it needs to be clarified so that it doesn't look in danger of partially contradicting hyp #1.)
ReplyDeleteNice post, though.
"... can impose large costs on innocent bystanders (anyone remember 2008?)"
ReplyDeleteI remember it had very little to do with speculation. Speculation in stocks and commodities had nothing to do with the crisis at all. Speculation on debt, credit-default swaps, overnight repurchases and CDOs may have had something to do with the crisis, but not really very much in the long run. It wasn't the case that panic in speculative markets sent debt products to prices far below reasonable estimates of their value. It was more the case that reasonable estimates were very low or unobtainable. Credit Default Swaps made losses appear in unexpected places, but I haven't seen any evidence that the they created more losses than would have occurred otherwise.
In the proposed financial transactions tax speculation on stocks and commodities are included, but the rest are specifically excluded. So, this tax targets the major part of the financial system that functioned throughout the 2008 crisis and excludes specifically the parts that failed.
Not speculation as its more technically defined, but then this tax isn't just on speculation - its on transactions. Perhaps its confusing to even bring in the word "speculation". "Speculative transactions" might be better.
Deletere: "In the proposed financial transactions tax speculation on stocks and commodities are included, but the rest are specifically excluded. So, this tax targets the major part of the financial system that functioned throughout the 2008 crisis and excludes specifically the parts that failed."
DeleteOK reading the rest of your post perhaps I was wrong. Does this really only target speculation? My impression was that it targeted non-consumer financial transactions in general.
Depending on which proposal you read it's not entirely general. I checked this just now. The EU proposal doesn't include Credit Default Swaps. Originally it did include overnight repurchases, but I've read that recently they've changed their minds about that because margins are so thin in that market that the tax would wipe it out. The tax doesn't cover issuing or extinguishing debt or securities, only trading in them.
DeleteI think you need to incorporate Felix Salmon into your views. Not only is 0.05% really low, it is really, really low, and is in fact a tenth of the duty it currently extracts on transactions of UK stock, and half of what the EU plans.
ReplyDeleteStamp Duty Reserve Tax is mostly only paid by retail investors. Institutional investors don't have to pay it because they're also "market makers". It's not a valid comparison.
DeleteI don't really think of a transactions tax as a Robin Hood tax. I think of it as a tax on the thundering herd, as a way of helping to stabilize the market. Calling it a Robin Hood tax is a way of selling the idea to the public.
ReplyDelete(I did not watch the linked video, I am relying upon memory about what was discussed a few years ago. If my comment does not match that video, that's why. ;))
"I think of it as a tax on the thundering herd, as a way of helping to stabilize the market."
DeleteBut, on average, are the thundering herd wrong? So, is stabilizing them wise?
I'm very sceptical.
On average the Tacoma Narrows Bridge was level.
Delete