Financial transaction tax follies and the socialist model

As the economic world approaches the end of debt supercycle, an idea first put forth by Scottish-Canadian Martin Barnes who is the Chief Economist at Bank Credit Analyst out of Montreal, the hunt is on for culprits and more importantly more money to keep the simplistic model of borrow-and-spend afloat as additional debt is met with reduced multiplier effect.


This effect is apparent in the recent US economic growth where several years of trillion-dollar deficit spending has yielded the weakest economic recovery since WWII. Usually it is a case of, larger the  economic downturn, stronger the subsequent economic recovery but don’t tell that to Obama who is busy blaming it all on Bush,  except of course for the CIA team setup to find bin Laden.

Into this debate wades NY Times, with an article that succinctly advises against implementing the financial transaction tax to generate additional revenue. Yes, that NY Times, the bastion of liberal thought. It notes the following.

The idea behind a financial transaction tax, which is a tax on individual market trades, has a smart pedigree.John Maynard Keynes suggested it, and James Tobin, a Nobel laureate in economics, was its most famous modern advocate. Tobin, who died in 2002, wanted to “throw some sand in the wheels” of the markets, and his idea, endorsed by Joseph Stiglitz and Lawrence H. Summers among others, is based on an increasingly held belief that markets are far from efficient. Imposing a transaction tax on each individual trade would eliminate wasteful trading and reduce market volatility, ending short-term speculation and mispricing of assets….

A study of New York State’s tax over those eight decades by Anna Pomeranets and Daniel G. Weaver found that it increased the cost of capital for investors and reduced trading volume. Most important, they found the tax actually increased trading volatility by as much as 10 percent….

In 1984, Sweden adopted a financial transaction tax. Some 30 percent to 50 percent of the country’s trading volume then shifted to Britain. The lower amount of trading meant that not only did the tax yield less money than predicted but that the country lost more in capital gains taxes than the financial transaction tax raised. The tax was abolished in 1991….

In Britain, for example, where the financial transaction tax has fluctuated from half a percent to 2 percent, the tax has raised significantly less revenue than one might expect, about £3 billion a year. The reason is that investors who trade regularly in Britain use options to avoid the tax, which applies only to trading in stock. The result may be that the tax pushes investors into more risky securities in their efforts to avoid it….

France has adopted a 0.2 percent financial transaction tax involving securities of a company with a market capitalization of more than 1 billion euros. The full effects of France’s tax are not yet known, but a preliminary study by Credit Suisseaccording to The Economist, found that stocks not subject to a tax rose 19 percent by volume, but those affected by the tax declined 16 percent. And the net effect of the tax appears to have shifted trading to smaller stocks not subject to it, distorting the allocation of capital, which is another problem with the tax.

Will this logic dissuade the Obama-bots of the world? Unlikely. Perhaps the NY Times printed the article out of concern for its advertising linage because of the following, which is noted in the article above.

Although disputed, one study in 2004 by the Partnership for the City of New York found that if New York State started keeping a tax of 0.25 cents per share traded, it would lose 23,000 to 33,000 jobs for every 10 percent drop in volume and more than $3 billion in lost revenue and economic value, probably more than offsetting the amount it collected.