The derivatives market, which nearly killed us in 2008, could be $1 quadrillion.
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.