The derivatives market, which nearly killed us in 2008, could be $1 quadrillion.
  • The derivatives market, which nearly killed us in 2008, could be $1 quadrillion.
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The federal deficit will be a staggering $1 trillion next year. Corporate debt is an astonishing $6.3 trillion. Globally, the derivatives market, which nearly killed us in 2008, could be $1 quadrillion. Speculation is rampant in stock and commodities markets. Computerized high-frequency trading — done in fractions of a second — is more than half of stock market activity. The huge gap between the richest 1 percent and the rest of us is widening. Reforms instituted after the 2008 debacle have been wiped away as lobbyists have fed the sticky fingers of Washington politicians.

Jim Welsh of San Marcos: . The tax “would not dampen speculation as much as people think it would.”

In short, Wall Street and Washington, D.C. greed have put us on the brink of a global crisis again.

There is a pill we could take that would alleviate — but hardly eliminate — what threatens to wallop us. It’s the financial transactions tax — a tiny (say, 0.1 percent) tax rate on the buying and selling of stocks, bonds, derivatives, and other financial instruments.

Frank Partnoy: The financial transactions tax “would be very difficult to implement."

Two years ago, the Tax Policy Center said a 0.1 percent tax rate could bring in $66 billion a year, with 40 percent coming from that top 1 percent and 75 percent from the richest 20 percent. According to the New York Times, the proposed tax, sometimes called the Robin Hood Tax, would help redistribute wealth from the non-needy to the needy — a reversal of the trend that began in the 1980s.

Del Mar's Arthur Lipper: “What is the evidence that more government is a valid public objective?”

A 2016 study by the Brookings Institution concluded that a financial transactions tax would raise substantial revenue while curbing speculative short-term and high-frequency trading — thus helping to steer money toward socially useful activities such as capital spending and education and away from gambling, which dominates so much of today’s financial scene. In short, such a tax could encourage long-term investing, or patient capital — a desirable end.

Ross Starr of UCSD: "Financiers are likely to figure out how to make profitable trades without incurring taxes.”

Says Matt Taibbi of Rolling Stone, “A financial transactions tax kills three birds with one stone. It raises money, provides a major disincentive to socially useless volume-based trading, and decreases dangerous speculative volatility.”

Opponents of the tax claim it would have to be instituted globally; it wouldn’t work in one country, because trading would be done in countries without the tax. (Hello, obscure havens Andorra, Nauru, Niue, and Seychelles.) However, Brookings points out that Hong Kong, Switzerland, Singapore, South Africa, and the United Kingdom have thrived despite having such a tax. The United States had one from 1914 to 1965, and a very tiny tax now funds the Securities and Exchange Commission. Billionaires Bill Gates Jr. and George Soros favor such a tax, as do politicians such as Bernie Sanders.

Economists and financial experts with roots in San Diego County may agree with the societal objectives of such a tax but question if it would work and also wonder if side effects may offset the positive aspects. A good example is Jim Welsh of San Marcos, who is a portfolio manager and tactical strategist for Smart Portfolios of Seattle. He believes that in the past three to four decades, corporate boards of directors have concentrated almost wholly on raising stock prices. The share of income going to workers “hasn’t kept pace,” and the economy would be better off if workers got a bigger piece of the pie.

A financial transactions tax would be progressive, spreading more income and wealth down to lower levels at the expense of the plutocrats. But Welsh fears “unintended consequences,” such as possible excessive regulation. The tax “would not dampen speculation as much as people think it would.” When the next recession inevitably comes, the banking system will have to be fortified, and a tax on financial instruments would hurt.

Frank Partnoy, former law professor at the University of San Diego who this year became a professor at the UC Berkeley School of Law, has written extensively on the dangers of derivatives and hyperspeculation. But, he says, the financial transactions tax “would be very difficult to implement. It would require defining what is subject to the tax and what is not, and if we’ve learned one lesson from the financial markets in recent decades, it’s that clever bankers are very good at moving from regulated transactions to equivalent unregulated ones. Such a tax would require international coordination. Without that, the taxed transactions would simply flow overseas.”

Partnoy adds, “If it worked, a financial transactions tax could be a progressive and potentially efficient tool to raise revenue. But the devil is in the details, and financially sophisticated bankers are very good at devilish details.”

Ross Starr, professor of economics at the University of California San Diego, has a similar view. Constructed correctly, the tax could be a force for good. It would have to be “high enough to discourage destabilizing speculation and abusive transactions and low enough that no productive trades are impeded.”

Starr feels high-frequency trading has a leg up on ordinary investors who can’t keep up with the action, “but there is not much evidence that such trades are particularly costly to investors,” he says. A high financial trading tax could severely dent or wipe out such activity. Overall, he agrees with Partnoy. Wall Street and the banking industry will find ways to evade these taxes. “Financial institutions are endlessly creative. Financiers are likely to figure out how to make profitable trades without incurring taxes.”

Some tout the tax as a tax on Wall Street. But Wall Street will only pass it on to investors, says Starr. That is true, but in one sense, the passing of the tax to investors would be progressive: stock ownership is concentrated among the wealthy and upper-middle class. However, the superwealthy don’t buy and sell rapidly, Starr points out.

Del Mar entrepreneur Arthur Lipper, scion of a famous Wall Street family, doesn’t see positives in this tax. “The more the tax, the more the government,” says Lipper. “What is the evidence that more government is a valid public objective?” He, along with others, notes that taxing transactions will reduce market liquidity “to the detriment of investors.”

Lipper says he has a better idea: “What about the government increasing available funds by reducing elected officials’ salaries and pension and health benefits?”

Now, there is a solution that wouldn’t get through Congress.

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Comments

Cassander Sept. 26, 2018 @ noon

"What is the evidence that more government is a valid public objective?" Why, the examples of every post-industrial Western democratic society except ours!

What is the evidence that allowing creeps like Lipper to get rich from immiserating everyone else a valid public objective? Because that is the issue which has wrecked our economy over and over again: the lack of protection from the predations of private capital.

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Don Bauder Sept. 26, 2018 @ 12:28 p.m.

Cassander: I certainly wouldn't call Arthur Lipper a predator. His family company has provided many important services to the public.

I will say this: there are certain critical parts of our economy that the government has a legitimate role: education and healthcare, for example. Government has a role in preventing predatory activities in the private sector -- banking, for example. Best, Don Bauder

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Cassander Sept. 26, 2018 @ 1 p.m.

I respect your reasons for feeling that way. But anyone who claims "the more the tax, the more the government" as inherently bad fits the epithet.

Those who say that usually believe the only 'legitimate' government functions are police and commercial jurisprudence; that is, for what protects their capital. Taxation for any other functions, such as for social welfare as you mention, is theft of their pelf. Put next to his other comment about whether "more government is a valid public objective," I can only conclude Lipper shares this belief.

If I've misread his political philosophy, then let him correct my interpretation. Otherwise, no amount of sheepskin can conceal such wolves.

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Don Bauder Sept. 26, 2018 @ 9:45 p.m.

Cassander: Arthur Lipper explains his views in a note above. Personally, I believe that government should play a role, greatly but not wholly through taxation, in evening out the gross maldistribution of wealth and income. That imbalance will destroy our economy at some point.Best, Don Bauder

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clockerbob Sept. 26, 2018 @ 3:44 p.m.

The word debt attached to a sum of money is only valid if the entire sum is going to be repaid. Currently,country to country debt is consider to be repaid if the country in debt can meet the annually interest payment. The balance will never be repaid. So don't withdraw currency from the economy with Taxes but just issue more bonds. We are in the tenth year of the 'Golden Age of Debt" ,thus, Detroit more then any other metropolitan area in the world is being labeled a 'renaissance' city because Detroit can't afford to finance their school system and have the entire debt transferred to the state of Michigan.

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Don Bauder Sept. 26, 2018 @ 9:48 p.m.

clockerbob: And Michigan is stepping in and mismanaging cities, such as Detroit and Flint. Cleveland is another Detroit. Chicago is next in line. Best, Don Bauder

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Don Bauder Sept. 26, 2018 @ 9:49 p.m.

Arthur Lipper: You are a revolutionary in the royalties movement. Best, Don Bauder

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Don Bauder Sept. 26, 2018 @ 9:52 p.m.

Arthur Lipper: If the private sector behaved, big government would not have to get bigger. Unfortunately, we need more regulation of securities, banking, the environment, for example. Best, Don Bauder

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Darren Sept. 26, 2018 @ 11:54 p.m.

Dear Don, thanks again for your fine investigative reporting and willingness to expose those that much news media, will not report on. Take care...

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Don Bauder Sept. 27, 2018 @ 6:49 a.m.

Darren: I don't know why media are neglecting the financial transaction tax. Best, Don Bauder

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Frederick Simson Oct. 3, 2018 @ 5:14 p.m.

Re: clockerbob

The word debt attached to a sum of money is only valid if the entire sum is going to be repaid. Currently,country to country debt is consider to be repaid if the country in debt can meet the annually interest payment. The balance will never be repaid.

This seems to be a lesson learned by the huddled masses. If countries can avoid paying principal, then principle is no longer of any value. (pun intended) However Bank of America definitely valued the principal of my mortgage. Being a man of principle kept me on a schedule, and I repaid that debt in full as of this year, 5 years early. My parents' struggles taught me that true freedom is free of debt. I have found I enjoy my work now as the pressure to be subservient has been removed. I will remain in the workforce only as long as the enjoyment continues.

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Don Bauder Oct. 4, 2018 @ 7:17 a.m.

Frederick Simon: Good for you. Look at all the families that lost their homes in the 2007-2009 crash. The federal government bailed out the banks but it did not bail out homeowners. The effects of that turmoil are still with us, and in a couple of years we could have a repeat, although lending practices are not as crazy now as they were prior to the 2008 crash.

Our family has had three mortgages in 50-plus years, and we built and financed our current home with cash. Best, Don Bauder

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Don Bauder Oct. 4, 2018 @ 7:21 a.m.

Louis Rodolico: Yes, we could have another crash in a couple of years. Asset values are inflated. The major banks are as careless as ever in speculative activities, such as dealing in derivatives. We live in a casino world. Best, Don Bauder

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shirleyberan Oct. 5, 2018 @ 1:37 p.m.

I can't comprehend your articles all the time, even when I tried to read your SD finance and money articles but recently came upon the note that Trumphonyhouse reduced the tax IRS review body significantly so that not a lot of audits going down on scammers like minded as himself.

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Don Bauder Oct. 6, 2018 @ 12:20 p.m.

shirleyberan: Oh yes. Part of the Trump/plutocrat scams is reducing the funds that the IRS, SEC and other regulatory bodies get, so the crooks can have a license to steal. And they are stealing from us, the taxpayers. This was going on long before Trump arrived. Best, Don Bauder

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jv333 Dec. 6, 2018 @ 1:15 p.m.

No one likes the concept of ‘redistribution of wealth’ .... but we should strive for a more level playing field. We’ve morphed into an oligopoly barring entry for competition. We’ve seen million of US jobs lost to free trade ... how many US factory closures? 70,000? Is it no wonder we have a meth and opiate crisis wrapped up with a poverty/homeless crisis?

The problems have now spilled into the streets .... when the elite have to step over homeless to get to the opera ....the problems are now pretty overwhelming ....and we can’t recognize the US that we used to know ...

In the meantime.... Gates, Buffett and many billionaires are pledging to leave all their wealth to philanthropy .... let’s get busy ....

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dwbat Dec. 6, 2018 @ 2:47 p.m.

Actually, the pledge is to leave a majority of their wealth, not "all" of it. But that is still a humongous amount.

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