News Analysis: Should the U.S. Enact a Securities Transfer Tax?
by Lee A. Sheppard and Martin A. Sullivan
by Lee A. Sheppard and Martin A. Sullivan
Date: Sep. 14, 2009
|Lee A. Sheppard and Martin A. Sullivan discuss whether a securities transfer tax would have prevented the financial crisis and the arguments for and against the implementation of a Tobin tax to curb short-term trading.|
Let's recapitulate. The debt meltdown was caused by too much debt and not enough regulation.
It was not an accident, as maintained by the Obama administration. It was not caused by the Chinese foisting their trade surpluses on American borrowers, as maintained by Federal Reserve Board Chair Ben Bernanke. It was not caused by liars' loans. Liars can lie all they want, but someone in a position of responsibility has to lend them the money, and regulators have to look the other way.
Were securitization and derivatives contributing factors? Yes, absolutely. Securitization made liars' loans possible by allowing the lenders to fob the risk off to unsuspecting pensioners in the form of collateralized debt obligations (CDOs), while investment banks that packaged the loans pocketed fees along the way.
Those same bankers profited mightily from an opaque and unregulated market for derivatives, purchased by many institutions that ultimately passed the risks along to smaller investors and eventually taxpayers. The Bank of International Settlements pointed out that derivatives magnified risk, rather than diffusing it, as their defenders -- chief among whom was former Federal Reserve Board Chair Alan Greenspan -- maintained.
Oh, and because Bernanke and Greenspan kept interest rates below the rate of inflation, monetizing every squeak in the securities markets, commercial and investment banks were able to operate as de facto hedge funds, using heavy leverage to profit by trading for their own accounts. The shadow financial system was part of the problem, but the mainstream financial system was just as leveraged. Low interest rates drove up prices for houses and securities. Regular people borrowed to finance lifestyles they could not afford. There was a boom in consumption.
Historically, banking was boring. Bankers were supposed to live off the spread by moving money from savers and investors toward productive uses in the economy. Boring utilitarian banking, however, does not produce 20 percent returns. So commercial and investment banks essentially got out of regular commercial lending and into debt-fueled speculative activity that mostly benefited their employees.
Did any of this speculative activity benefit the real economy? No. It temporarily created jobs in what one Citigroup economist referred to as the "plutonomy" -- waiters, gardeners, personal trainers, Ferrari dealers, and guys who lay marble tiles in the foyers of Park Avenue cooperatives. Once a service sector, finance became a disproportionate part of the economy. Regulators and economists, including the entire financial team of the Obama administration, stood by and pronounced these developments to be the inevitable working of the free market.
The borrowing binge did not go to productive uses. No new factories were built. No new opportunities were created for middle-income people to better themselves. Instead, the country's best and brightest headed to investment banks and hedge funds, where they learned to make a killing by betting huge sums on small, momentary market anomalies. The same thing happened in Britain, a country whose manufacturing sector shrank further and earlier than the American manufacturing sector.
Now some are questioning whether the financial sectors in the U.S. and Britain were allowed to become too big and whether recent innovations, like CDOs and credit default swaps, have been productive.
"We need finance, but finance as it currently operates in the United States has become a problem," Massachusetts Institute of Technology economist and former IMF official Simon Johnson wrote in his blog recently. "Show me the evidence that this kind of innovation really adds value, socially speaking -- rather than providing a very modern way to extract amazing 'rents.'"
What's this got to do with tax? Taxation may be necessary to tame the overgrown, politically powerful financial sectors. Reregulation in both the United States and Britain has devolved into mild exhortations for imposing higher capital requirements, rather than root-and-branch regulatory reform. More capital may not be enough, according to Lord Adair Turner, head of the British Financial Services Agency and a former investment banker.
In unofficial remarks from an August 27 magazine interview, Turner questioned whether the financial sector should be as large as it is. Fretting that higher capital requirements might not do the job, he suggested a special tax on the financial sector to reduce returns. Citing the destabilizing effect of speculation on the British economy, Turner floated the idea of a low-rate tax on securities transactions (Turner, "How to Tame Global Finance," Prospect, issue 162, Aug. 27, 2009).
Bankers howled, and historian Niall Ferguson accused Turner of wanting to kill off London as a financial center. Turner, however, was referring to a multilateral, worldwide tax. "Some of the commentary that suggests I am saying we should just slap a tax on London on a unilateral basis is really rather silly," the August 30 London Times reported him saying. As this article was being written, the ever-controversial Turner has backed living wills for banks.
In the Prospect interview, Turner specifically referred to "taxes on financial transactions -- Tobin taxes." The name refers to American economist and Nobel Laureate James Tobin, who in 1972 proposed a tax on international currency transactions to stabilize markets after the breakdown of the Bretton Woods system of fixed exchange rates. The term has also been used to describe a tax on the purchase and sale of shares. But the tax in its various manifestations can be imposed on other securities, such as debt instruments, futures, options, and other financial derivatives.
It is not clear that Turner was suggesting only a Tobin tax. At times in his August 27 remarks, Turner seems to be referring to any type of tax on the financial sector that would reduce profits -- not just a tax on trades. Turner defended his position by citing the 1980 Conservative Party proposal to tax excess financial sector profits ("Hammering the City: Lord Turner Talks Tough," London Times, Aug. 30. 2009).
HM Revenue & Customs already collects a version of the Tobin tax. Britain's stamp duty reserve tax is imposed at a rate of 0.5 percent of the registration of new ownership of equity shares and of debt convertible into equity.
So how can Turner be criticized for proposing a tax Britain already has on the books? The stamp tax applies only to equity. Straight debt, futures, and options are not subject to the tax. Shares sold for trading on foreign markets are subject to a one-time 1.5 percent tax (unless and until the shares trade again on British markets).
Between 1914 and 1966, the United States had a securities transfer tax. For equities the rate was 0.1 percent for original issue and 0.04 percent for subsequent trades. For debt, the corresponding rates were 0.11 percent and 0.05 percent. Government obligations -- federal, state, and local -- were exempt. The tax was repealed as part of the Excise Tax Reduction Act of 1965. In 1987 then-House Speaker Jim Wright proposed a stock transaction excise tax (STET) as a means of reducing the federal deficit. (For prior coverage, see Tax Notes, Mar. 9, 1987, p. 942 or 87 TNT 45-5 .) At the time, a Joint Committee on Taxation background pamphlet for a House Ways and Means Committee hearing on revenue raisers described a 0.5 percent STET that raised $22 billion over three years and could include "stock and debt securities, whether or not publicly traded, options, futures, forward contracts, and other items, such as limited partnership interests, that are close substitutes to the above securities." (For JCX-13-87, see Doc 87-6429.)
In 1990 a 0.5 percent securities transfer tax got a lot of serious attention during that year's arduous budget summit, but it was not part of the subsequent legislation. A 1990 Congressional Budget Office publication described a "broad-based" 0.5 percent securities transfer excise tax on the value of transferred equities, debt (except Treasury issues), and options traded on U.S. exchanges and on trades by Americans on foreign exchanges. The tax was estimated to raise $58 billion over five years. (For "Reducing the Deficit: Spending and Revenue Options," Feb. 1990, see Doc 90-1302.)
After 1990 and until the current financial meltdown, interest in the tax all but disappeared on Capitol Hill. In this century, a Tobin tax on currency transactions has gotten some play in Austria, Belgium, France, and Germany. A multilateral version of the tax is frequently mentioned as a source of revenue to fight global poverty. Antiglobalization activists in particular like the idea.
Since 2008 the combination of large deficits and widespread public discontent with the financial industry has rekindled some interest in the tax in the United States. During the September 2008 debate on funding the $700 billion emergency relief for the finance sector, Rep. Peter A. DeFazio, D-Ore., proposed a 0.25 percent financial transactions tax on stock, options, and futures. His bill, H.R. 7125, Let Wall Street Pay for Wall Street's Illiquid Assets Act of 2008, had 34 cosponsors and was estimated to raise $150 billion annually.
Dean Baker, codirector of the Center for Economic and Policy Research, generated buzz in the blogosphere with his proposal for a financial transactions tax of 0.5 percent on sales of shares and lower rates for other financial instruments. (For "The Benefits of a Financial Transactions Tax," see Tax Notes, Oct. 27, 2008, p. 457.) Baker estimated that his proposal could raise more than $100 billion for the government. Highlighting the revenue potential of the tax, Bob Herbert wrote a favorable column on Baker's proposal for The New York Times ("Where the Money Is," The New York Times, Jan. 12, 2009).
The Economics Debate
For several reasons the STET is an unusual tax for economists to support. First, it is a tax on transactions. Economists usually hate transactions taxes because they place a seemingly indiscriminate burden on certain items just because they change owners frequently. But as Tobin himself advocated, the point of a STET would be to discourage the activity being taxed. Second, a STET could be seen as a tax on capital, and most economists believe an income tax already overburdens capital. Overburdening may overstate the effect of the U.S. income tax as currently constituted.
Capitalists have done a good job of getting capital excused from the income tax. Lower rates are provided for capital gains and dividends, and the realization requirement allows deferral of the former. The tax law even permits the realization requirement to be skirted by means of derivatives, which allow monetization without taxation. And hedge fund managers with no capital invested are taxed on compensation as though it is capital.
Third, the STET directly challenges one of the most fundamental precepts of economics: the religious belief in the efficiency of markets. With communications technology and computers making information cheap and transactions fast, financial markets are supposed to be the most efficient of them all.
The seeming perfection of the math proved to be seductive. Indeed, unquestioning belief in the efficiency and correctness of financial market pricing got us in the trouble we are in. Until the financial markets blew up, few economists on either side of the political spectrum believed that they were anything but perfect. (For analysis, see Paul Krugman, "How Did Economists Get It So Wrong?" The New York Times Magazine, Sept. 6, 2009.)
Nevertheless, some of the most highly respected names in economics favor the STET. In addition to Tobin, fellow Nobel Laureate Joseph Stiglitz has endorsed the idea. And British economist John Maynard Keynes proposed the tax in his landmark 1936 book, The General Theory of Employment, Interest and Money.
In The General Theory, Keynes described the behavior of the securities markets using a beauty contest metaphor. The trick was not to find the most beautiful contestant, but the one that the most others found beautiful. Keynes did not want the securities markets driving business decisions. Keynes knew whereof he spoke. He was, after all, a man who became rich through currency speculation.
The core economics argument is that some types of securities trading can be harmful and -- as in the case of any market externality -- market efficiency can be restored by using taxes to make the private sector take into account the social costs of its activities.
Advocates of a STET have a tough challenge, but one that has been made easier by the recent speculative excesses of Wall Street and the City of London. Economists need a theoretical construct to explain why some trading is beneficial and some is harmful in order to devise a mechanism to tax one more heavily than the other.
On the issue of what type of trading is bad, the answer STET advocates give is some or most short-term trading. From a design standpoint, a STET is perfectly targeted to short-term trading -- as Tobin intended. There would be no need to differentiate short-term and long-term trading. Because the STET is a tax on turnover, it automatically imposes a proportionately greater tax on short-term trading than long-term trading.
Moreover, to calibrate the level of tax, economists should have some notion of the quantitative impact of the harm being caused. One could point to the $9 trillion cost of the U.S. financial bailout, but that is too broad a measure of the cost of speculation.
Although securities transfer taxes have been put in place and still are in place in some countries, little thought has been given to the most desirable rate. There does not appear to have been any research on the proper rate of tax. In the United States the rate of tax most often discussed is 0.5 percent of value, but no rationale is apparent.
Arguments in Favor
What is the economic rationale for singling out short-term trading for punishment? There are two main arguments. (1) A STET would reduce volatility and harmful speculation. Proponents of a STET argue that financial markets would be efficient if all traders based their decisions on information about the fundamental values of securities. Price volatility due to fundamentals is necessary and unavoidable.
But not everybody trades on fundamentals. Believe it or not, some investors trade on rumors and trends, trying to guess what others are thinking. Keynes liked to distinguish between "reasonable calculation" and "animal spirits." The former is constructive, while the latter makes security prices more volatile than they need to be. So Keynes proposed a transactions tax to make trading more expensive in the United States:
- Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism -- which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object. These tendencies are a scarcely avoidable outcome of our having successfully organised "liquid" investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive. . . . The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States (The General Theory, ch. 12).
A more sophisticated version of this argument can be found in a 1987 paper coauthored by Lawrence H. Summers. Summers was a leading advocate for a STET in the late 1980s and at the beginning of the Clinton presidency. Summers, now the chief of President Obama's economic security council, called noise traders "idiots." Like Keynes, he and his coauthors concluded that share prices are more volatile than can be justified on the basis of news about underlying fundamentals (J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann, "The Economic Consequences of Noise Traders," NBER Working Paper No. 2395).
Volatility in and of itself is a turnoff to investors because it increases risk, which they must learn to live with or find ways to insure themselves against. Volatility from noise traders is particularly harmful because it distorts price signals from the market that reflect fundamental value. It follows that making assets less liquid may force traders and investors to focus on fundamentals.
One may be convinced by these arguments that that market volatility must be reduced, but STET advocates have an additional hurdle: They must demonstrate that a STET reduces volatility. This is a problem.
Theoretical research is ambiguous on the point, and empirical research provides little support. In a review of the evidence from other countries' experiences, IMF economists cited five studies finding that security price volatility does not decline in the presence of a transactions tax. One study found "a statistically significant but economically insignificant" effect. (For the study, see Karl Habermeier and Andrei A. Kirilenko, "Securities Transaction Taxes and Financial Markets," 2001, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=879453.)
(2) A STET would curb the wasteful drain of economic and human resources into the financial sector. The second major argument for a STET is that the financial sector drains an inordinate amount of resources from the economy. Banking, insurance, brokerage, and other services may be essential to the economy but, according to STET advocates, the enormous profits, salaries, bonuses, and fees are out of proportion to the benefits provided.
"If most of finance as currently organized is a form of electricity, then we obviously cannot run our globalized economy without it," Johnson wrote in his blog. "On the other hand, there is growing evidence that the vast majority of what happens in and around modern financial markets is much more like junk food -- little nutritional value, bad for your health, and a hard habit to kick."
If the services are not valuable, why are financiers so well compensated? Johnson argues that they have figured out ways to extract excess rents for their services -- from customers ranging from users of derivatives, the pricing of which is opaque, to users of consumer credit, the price of which is opaque and very high.
The argument is that much of the activity in financial markets is not wealth creation but zero-sum redistribution. There may well be some productive reallocation of risk, but a lot of the repackaging of risk is no more productive than casino gambling. Derivatives enabled risk to be reallocated from those who did not wish to bear it, like the lenders of dubious mortgages, to those who were unaware of the risk they were assuming, like the insurance companies and pension funds that bought CDOs composed of those dubious mortgages.
An additional societal cost of an overgrown financial sector is the squandering of human talent, noted by Turner. The head of one investment bank complained that pay caps would cause his traders to move to other sectors of the economy. Said Harvard economist Benjamin Friedman:
- At the individual level, no one can blame [college graduates headed into finance]. But at the level of the aggregate economy, we are wasting one of our most precious resources. While some part of what they do helps to allocate our investment capital more effectively, much of their activity adds no economic value. Perversely, the largest individual returns seem to flow to those whose job is to ensure that microscopically small deviations from observable regularities in asset price relationships persist for only one millisecond instead of three. These talented and energetic young citizens could surely be doing something more useful ("Overmighty Finance Levies a Tithe on Growth," Financial Times, Aug. 26, 2009).
Similarly, financier and columnist John Plender wrote:
- The huge increase in the size of the financial sector suggests precisely that much innovation is simply rent-seeking that redistributes wealth to financiers at considerable cost to society ("Weighing Up Pros and Cons of Financial Innovations," Financial Times, Sept. 2, 2009).
In advocating a STET, Baker acknowledged that theoretically the impact of the tax on volatility can go in either direction. He concluded that it is reasonable to believe that "the reduction in trading volume that would follow from the imposition of the [STET] would not qualitatively change the degree of volatility in financial markets." Instead, Baker focused on the speculation-is-costly theme. He observed that "much of the economic activity that will be lost has the character of gambling." Baker proposed a "middle scenario" in which a STET would reduce trading volume by 25 percent and save $60 billion of capital and labor costs without harming the financial sector's ability to allocate capital.
The argument has gut appeal to those who believe Wall Street compensation levels are too high. But the main difficulty here is the subjective assessment that some trading serves no social purpose -- especially given that this trading passed the test of being viable in the marketplace.
If market participants are willing to pay for financial services, does it really make sense for tax policy to try to intervene? Even if there is little social value, can tax law be written to distinguish the valuable from the worthless?
"Excess financial intermediation, the result of hyperactive financial innovation, destroys value by causing people to make investments with negative returns. Put another way, we cannot say that innovation is necessarily good simply because there is a market for it," Johnson wrote. (See Johnson and James Kwak, "Finance: Before the Next Meltdown," Democracy, no. 13 (Summer 2009).)
Johnson argues that just because a market has been created for some financial innovation, that does not mean the innovation is good or desirable. He believes that financial regulation should distinguish good financial innovation from bad and prohibit certain products. "The role of financial regulation should be to discourage innovation that produces excessive intermediation and promote innovation that delivers financial services that people need," he wrote.
Not surprisingly, the STET is vehemently opposed by financiers and antitax conservatives. But not all of the criticism comes from those sources. Despite the endorsement of the STET by some prominent economists, there is significant skepticism from academics about its benefits. (1) A STET would increase transactions costs and reduce liquidity. Economists define an efficient financial market as a market in which all existing information is incorporated into existing prices, so that only new information changes prices. If transactions costs are too high, traders may not respond to new information. By increasing transactions costs, a STET can reduce the effect of news on share prices and reduce the efficiency of financial markets.
Also, by reducing trading volume, a STET is likely to reduce market liquidity. Reduced liquidity means traders must assume greater risk and will demand a higher rate of return as compensation. In a 1990 article, Summers responded to that criticism by arguing that "trading opportunities have multiplied enormously over recent years." He noted that in the United States in the past, and around the world where STETs are in place, no liquidity problems have been evident. (For "The Case for a Securities Transactions Excise Tax," see Tax Notes, Aug. 13, 1990, p. 879.)
(2) A STET would raise the cost of capital. Even proponents of the STET will not deny that the tax would increase the cost of capital and discourage investment. To offset this detrimental effect of the tax, Summers argued that revenues from the STET should be used to reduce the burden on overtaxed corporate capital.
Capital, as the Japanese experience has shown, can be too cheap. If capital is too cheap, it is wasted on speculation and driving up the prices of existing assets. Cheap capital created a real estate bubble, and the Bank of Japan responded by propping up zombie banks and reducing interest rates to zero -- steps the Federal Reserve is now retracing. The refusal to recognize reality -- despite the prodding of Summers and other American officials -- produced the so-called Lost Decade.
Japan, however, had a strong industrial sector, and finance was not a large part of its economy. In the United States, overly cheap capital provided by Greenspan and Bernanke fueled the recent speculative boom and is currently fueling trading profits for the surviving financial intermediaries, which are denying credit to other sectors of the economy. (See Peter Boone and Simon Johnson, "The Next Financial Crisis," The New Republic, Sept. 5, 2009.)
(3) Widespread avoidance of the STET would damage the economy and result in less-than-expected revenue. Although the designers of the STET strive to make it as broad based as possible, R. Glenn Hubbard points out that several exceptions are likely for political and economic reasons. (For "Securities Transactions Taxes: Tax Design, Revenue, and Policy Considerations," see Tax Notes, Nov. 22, 1993, p. 985 or 93 TNT 239-46)
For example, intermediaries like mutual funds that manage portfolios on behalf of retail investors probably would be exempt. Also, market-making specialists that perform essential insurance and liquidity functions requiring rapid trading might also be exempted. Further, very short-term money-market debt instruments (like repurchase agreements) are likely to be exempt. These and other well-intended exemptions would create loopholes that encourage inefficient tax-motivated transactions.
The most visible and politically charged form of tax avoidance could be the movement of domestic securities trading to foreign markets. Habermeier and Kirilenko reported "a massive migration of stock trading volume from Stockholm to other financial centers" after Sweden imposed a STET in 1984 and doubled the rates in 1986:
- Widespread avoidance was one reason for the weak performance of the tax. Foreign investors avoided the tax by placing their orders with brokers in London and New York. Domestic investors avoided it by first establishing off-shore accounts (and paying the tax equal to three times the round trip tax on equity for funds moved off-shore) and then using foreign brokers (Habermeier and Kirilenko, (2001)).
They also pointed out that the doubling of the Swedish tax in 1986 resulted in only a 22 percent increase in revenue. Defenders of the tax, like Summers and Baker, argue that leakage could be curtailed through antiavoidance rules, such as requiring all U.S. residents and corporations to pay the tax regardless of the location of the trade. Defenders suggest multilateral cooperation to harmonize STET rates across international borders. This concern may be why Turner advocated a multilateral tax. As this article was being written, however, the G-20 finance ministers had been unable to agree on anything more complex than a bland communiqué about the need for more bank capital.
A Postmeltdown STET?
As a low-rate tax that could raise as much as $100 billion a year, a STET might get increasing attention. It could be argued that a STET aligns with Obama's promise to burden only the rich. Obama spin doctors should be comfortable arguing that the burden of a securities transactions tax falls on the financial industry -- even though the economic burden would also be on investors, including pension funds. Advocates of the STET two decades ago pointed to the 1987 stock market crash as motivation for the new levy. That 500-point single-day decline in the Dow now seems like a quaint memory compared with the recent near-death experience for the financial system. "The dramatic run-up of stock prices in the first three quarters of 1987 . . . followed by the October crash, tends to highlight the potentially adverse consequences of an environment where speculation is too easy," Summers wrote in 1990.
If a relatively small financial event did not justify a STET, perhaps a much larger one should. At the most basic level, the current financial meltdown has increased skepticism about policies that are based in faith about the efficiency of free markets, even on the part of ardent defenders:
- To understand what is going on we need a new paradigm. The current prevailing paradigm, namely that financial markets tend towards equilibrium, is both false and misleading; our current financial troubles can be largely attributed to the fact that the international financial system has been developed on the basis of that paradigm (George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (2008)). We are learning from [the financial meltdown] that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience -- the self-healing powers -- of laissez-faire capitalism (Richard A. Posner, A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression (2009)).
The central premise of a STET is that financial markets are unstable and, left to their own devices, quietly and continuously sap productivity as well as periodically deal the economy devastating shocks. Arguments against a STET are all variants of the theme that the tax would interfere with naturally efficient markets. At its core this is a classic pro-regulation vs. free-market debate. So any weakening in public acceptance of free market ideology is a boost for a STET. However, if we look more closely and examine the specific developments believed to be at the root of the financial meltdown, it's hard to see how a STET would have changed the course of recent financial history.
Speculation is only one of myriad causes identified for the financial meltdown. The others are legion and large enough to cause major problems by themselves: excessive leverage and inadequate capital, particularly in large financial institutions; low interest rates and loose monetary policy; poor mortgage underwriting and the housing bubble; inadequate regulation, particularly of nonbank financial institutions; no regulation of complex derivatives and off-balance-sheet risk; credit default swaps; excessive reliance on quantitative models; inadequate risk controls at financial firms; moral hazard and the implicit Fed promise to bail out institutions deemed too big to fail; and the failure of credit rating agencies to properly assess risk.
None of the items on this long list of commonly cited factors provides any clear justification for a financial sector tax in the form of a levy whose burden falls primarily on short-term trading. But let's not forget compensation practices that promoted risk-taking, which might conceivably be affected indirectly by a STET that raised the cost of trading. But even the compensation problem could be more directly addressed by higher individual income taxes or clawbacks.
What recent problems might the STET have prevented? It might have slowed down excessive trading and made leveraged bets more expensive.
In the new book The Road to Financial Reform, credit guru and former "Dr. Doom" titleholder Henry Kaufman cites an increase in New York Stock Exchange annual turnover from 78 percent in 1999 to 123 percent in 2007. If increased turnover and greater liquidity is damaging, this statistic increases justification for the tax (as well as increasing revenue estimates).
But Kaufman, who is no fan of a laissez-faire approach to financial markets, regards increased trading not as a cause of the meltdown, but simply as an indicator of the "feverish pitch in financial activity."
Kaufman criticized Turner's proposal for a securities transfer tax. "I think it is the wrong way to go," he said, arguing that the burden of the tax would simply be passed on to borrowers. "I think if you want to limit the growth of debt and financial intermediaries, there are different ways to go" (Bloomberg, Sept. 2, 2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahHn4CnxMyIU).
In another book analyzing the financial meltdown, A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation, author Richard Bookstaber argues that financial market risk can increase when more liquidity "makes it easier to take on levered position, because more liquid and readily priced securities make for better collateral." This could be construed as a case for reducing market liquidity through a STET, but using regulation to directly limit leverage would seem to be the more efficient approach.
We must conclude that while the current financial meltdown has strengthened the political and superficial economic arguments in favor of a STET, it is not a be-all and end-all, because it would not address many of the causes of the meltdown.
The overgrown financial sector, Johnson argues, is already imposing a tax on the population through its ability to capture excess rents. Moreover, Johnson frequently argues, the political power of the financial sector has saddled taxpayers with the enormous fiscal cost of the bailout. This phenomenon is often referred to as the "Bernanke put" -- the ability of the financial sector to pass along its losses to taxpayers while retaining the gains. "Financial innovation has obviously benefited the people who run and operate large financial companies. Has it helped anyone else, including their own shareholders?" Johnson asked rhetorically in his blog. "And if you can show broader social benefits (e.g., lower cost of capital, better ability to take nonfinancial risks that make sense, or anything else), do these outweigh the massive social/fiscal costs that are now apparent?"
The financial meltdown demands a stronger response than the tepid regulatory proposals coming out of the U.S. and British executive branches. (See Treasury Department, "Financial and Regulatory Reform: A New Foundation," June 17, 2009; and "Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms," Sept. 3, 2009.)
Taxation may have to stand in for the unwillingness to regulate financial intermediaries, though taxation, like regulation, requires backbone on the part of the political class. Alternatively, or in combination, the negative externalities from activities of the financial sector could justify increased taxation. As in so many areas of public policy, such as preservation of the environment, taxation and regulation can often serve the same purpose of discouraging the targeted activity. Revenue, as Tobin himself noted, is not the point.
Financial innovation can be productive, but much of what occurs on world financial markets is gambling -- make that government-subsidized gambling -- that has been shown to destroy wealth and jobs. But it is hard to explain how a STET is a solution to many of our recent problems. Its main benefit would be, as Tobin argued, to create some friction that would slow down speculative activity.
Moreover, the barrier for advocates of a STET is not merely political but fiscal. The bailout is premised on financial intermediaries returning to the status quo ante, supported by cheap capital and government guarantees. In other words, the bailout depends on a certain amount of government-subsidized gambling. Even Summers believes that the United States will grow its way out of trouble.
Like Japanese regulators before them, U.S. and British regulators are betting heavily that the too-big-to-fail financial intermediaries that they bailed out will earn their way out of trouble by doing more or less the same things they were doing before the meltdown, minus the subprime mortgages. Banks on both sides of the Atlantic are reporting bumper earnings from dealing in derivatives and trading for their own accounts. A tax that would throw a spanner in this government-subsidized gambling is unlikely.
"I believe that too much financial activity is not only socially worthless, but actually harmful," wrote William Buiter of the London School of Economics ("Forget the Tobin Tax: There Is a Better Way to Curb Finance," Financial Times, Sept. 2, 2009).
"One can share Lord Turner's diagnosis that the U.K. financial sector was allowed to grow too large and to get out of control -- almost a law unto itself -- without accepting the Tobin tax as part of the solution," Buiter concluded. Despite the consciousness raising resulting from the meltdown, we are no further along in our understanding of the value of a STET than we were two decades ago.
Fuente: Tax Analysts