photograph by Lauren Reid/National Nurses United
Assembly outside Congressman Darrell Issa’s Vista office called for a tax on Wall Street.
On September 1, two hundred labor union members assembled at the Vista office of Congressman Darrell Issa to promote the idea of a transaction tax — a tiny assessment on sales of stocks, bonds, currencies, derivatives, and the like. Because there is so much volume in these instruments, a 0.5 percent tax on each trade could raise $350 billion a year in much-needed government revenue. National Nurses United is promoting the idea in the United States. Leaders in Germany and France are also pushing for some kind of transaction tax in Europe.
“Through such a tax, we will make Wall Street pay for the damage it has caused to Main Street,” said one flyer making the rounds in front of Issa’s office. Those backing the idea say it will discourage speculation, the scourge of today’s markets all around the world.
Those are noble objectives that I agree with completely. Wall Street has never been horsewhipped for bringing the world to the edge of the abyss (and threatening to do so again). Gambling in financial instruments is dangerous and damaging, particularly since those on the inside have an advantage on the wee folk. A transaction tax could help level the playing field.
Sentimentally, I am all for a transaction tax. But realistically, I know it ain’t gonna happen. Because of last year’s unsavory Citizens United case, by which the Supreme Court permitted corporations to shower money on the candidates of their choice, Congress is almost 100 percent owned by Wall Street and big business. Before Citizens United, Congress and the White House, too, were only 85 percent in business’s pocket.
UCSD economist Hamilton says global tax necessary, unlikely.
But even if this tax were enacted, I doubt that it would work. First, experts in both Europe and America agree that it would have to be global. If restricted to one country or one region, the trades would simply move to countries without a tax. “It is inconceivable to me that every country would agree to the tax,” says James Hamilton, professor of economics at the University of California San Diego.
Such a tax “would be a great jobs program for [tax havens] Bermuda, the Cayman Islands, and Liechtenstein,” laughs Todd Buchholz, San Diego economist and author who advises hedge funds and runs one of his own. As Buchholz points out, the late banker Walter Wriston sagaciously observed, “Capital goes where it’s wanted and stays where it’s well treated.” That’s why we have tax and secrecy havens such as those Buchholz mentioned and numerous malodorous others. (The Caymans, first sighted by Christopher Columbus, were originally occupied by pirates and still are — pirates in pinstripes. With a population of 56,000, the Caymans are home to more registered companies than people and are the fifth-largest financial center in the world. You can see how the absence of income, capital gains, and corporate taxes, coupled with complete secrecy, attracts the sticky-fingered.)
Professor Starr agrees, says burden would be on investors.
National Nurses United says that the stock exchanges, brokers, institutional investors, and day traders will bear the burden of the tax. That gives Ross Starr, professor of economics at the University of California San Diego, a chuckle. The pain of the tax “will be shifted to public investors. The [promoters of the tax] might think they are taxing Wall Street, but they will be taxing investors.”
Agrees his colleague Hamilton, “It does not matter on whom the tax is officially levied. The incidence of the tax will ultimately fall on all investors.”
Some commentators are wailing that a tax as low as 0.01 percent per transaction would wipe out so-called high-frequency traders. Frankly, nothing would be more desirable for financial stability than the mass extinction of these predators. High-frequency traders, aided by fast-calculating computers, hold a position for minutes, or often seconds. They will make thousands of trades daily, usually ending the day with a zero balance.
A typical profit per trade may be a fraction of a penny — often well below one-hundredth of one percent per transaction. That’s the major reason a wee tax could wipe them out. Also, they account for an astonishing 65 to 70 percent of stock trading in the United States. Their computers are able to pick up information that has not yet crossed the news screens.
“Everyone is confused about why financial markets have allowed high-frequency traders to peek into what is happening to a market a few tenths of a second before anyone else,” says Starr. “They seem to be destroying the level playing field.”
Starr thinks a transaction tax would crimp the high-frequency traders. But they could always go offshore. “There is no reason you have to live in Greenwich, Connecticut. You can live in Trinidad and Tobago,” says the economist.
The traders might live in the Caribbean, but their bosses wouldn’t. “Back in the 1950s and 1960s, the islands away from the mainland might as well have been Gilligan’s Island,” says Buchholz. “Now you can set up a high-frequency trading post any place in the world. A lot of hedge funds [and United States–based manufacturers] are domiciled offshore. They may be based in New York, but the accounting and management services could be in Ireland or Bermuda. As an investor, you get a report, but it doesn’t say Madison Avenue. It may say Hamilton, Bermuda.” (Indeed, much of the insurance industry is based in Bermuda.)
There is a big debate now: does high-frequency trading enhance market liquidity or deter it? One study indicates that this rapid-fire, computerized trading makes the market more efficient. “Does it add liquidity or create turbulence? I don’t think anybody knows,” says Starr.
“I am a skeptic about the profitability of high-frequency trading,” says Buchholz. “But I do believe it adds liquidity to the system.” Today the small investor pays a much lower fee per transaction than formerly because of this increased liquidity.
The proponents of a financial transaction tax do have good arguments. The British instituted the so-called stamp tax on financial transactions in 1694. It’s the oldest tax in Great Britain. And while there is leakage — financial transactions taking place away from England — the London Stock Exchange is still the world’s fourth largest. A number of countries have successfully adopted transaction taxes of some kind. After all, there are honest people who pay their taxes, although, admittedly, there are proportionately fewer of them in the financial services industries.
In the United Kingdom, a security can’t be transferred unless the tax is paid; the dealer is responsible for collecting it. Basically, evasion of the tax implies ambiguity of ownership of the security. By and large, investors are willing to pay the small tax to assure their ownership.
There are many compelling reasons for instituting the tax, but I return to my original argument: ain’t gonna happen, thanks greatly to Citizens United.