Super Tobin Tax

Wikipedia:

A Tobin tax is the suggested tax on all trade of currency across borders. Named after the economist James Tobin, the tax is intended to put a penalty on short-term speculation in currencies. The original tax rate he proposed was 1%, which was subsequently lowered to between 0.1% and 0.25%.

Bob Herbert latches onto a similar, but broader version:

The economist Dean Baker is a strong advocate of a financial transactions tax. This would impose a small fee — ranging up to, say, 0.25 percent — on the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately.

According to Mr. Baker, the co-director of the Center for Economic and Policy Research in Washington, the fees would raise a ton of money, perhaps $100 billion or more annually — money that the government sorely needs.

But there’s another intriguing element to the proposal. While the fees would be a trivial expense for what the general public tends to think of as ordinary traders — people investing in stocks, bonds or other assets for some reasonable period of time — they would amount to a much heavier lift for speculators, the folks who bring a manic quality to the markets, who treat it like a casino.

“It raises money in a way that comes primarily at the expense of speculation,” said Mr. Baker. “The fees would be a considerable expense for someone who is buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3. The more you trade, the more you pay.

“For the typical person holding stock, who is planning to hold it for a long period of time, paying the quarter of one percent on a trade is just not that big a deal.”

The fees, though small, could amount to a big deal for speculators because in addition to the volume of their trades they often make their money on very small margins. Someone who buys an asset and then sells it an hour later at a one percent appreciation might feel quite pleased. He or she would be less pleased at having to pay a quarter-percent fee to purchase the asset in the first place and then another quarter percent to sell it.

Speculation gets a bad rap. It's easy to point to speculators when a currency gets battered or a stock gets dumped. But my response is two-fold. First, speculators provide liquidity to the market. So, say I decide my investment in company X is no longer the best use of my money, then the more people interested in buying my stock in company X the better. Likewise for the reverse, when buying a stock. Second, there is a huge difference between a casino and any financial market. Casino gambling is completely random. Red or black is just as likely to appear each time. Financial transactions, even speculators, make decisions based upon information not random luck. If speculators are pounding the Thai Baht, then there probably really is some underlying problem with the Thai Baht. To the extent that they use their information, they are adding that information to the market and making them more efficient. The problem arises, not when a large number of speculators are involved, but when a small coterie corner a market. Third, speculators are the easy villain for governments or management to blame when there's a problem with a currency or a stock, but often there really is a problem with the currency or stock that the speculators recognized and are pressing. It harsh, I agree. But that is part of capitalism. Now, speculation can be bad when panics hit. The contagion from the 1997 Asian financial crisis was exacerbated by speculators. But again the problem is the panic, not the speculators. In a panic people, well, panic. They don't act as rationally as they normally do. Speculators add fuel to that fire, but they aren't the initial reason for the blaze. So, all told speculation has an undeservedly bad reputation.

Bob Herbert is proposing this idea because he thinks that we need to raise revenue to cover deficits and thinks this is a relatively painless way that will only hurt, and I'm paraphrasing here, reckless, fat-cat Wall Street traders. It's easy to say that rich Wall Street people who make money off seemingly ersatz work make too much money and should be taxed. But the problem is that Wall Street is tremendously important for the long-term growth of the economy. It reallocates capital from underperforming sectors to growing industries. This is what makes capitalism so powerful. Now, I understand that it seems unfair that a person making something with their hands, which seems like real, honest work, doesn't make nearly as much money as somebody looking at numbers on a computer screen all day, but our bias for physical manifestations of work is what the problem is. A Wall Street trader is far more important to the long-term growth of the American economy, and by extension the World's economy and the salary growth of that person working with their hands. A 0.25% tax on transactions seems so small, and would be barely noticeable to the buy-and-hold types. But that tax represents a disincentive to the most important function in a capitalist economy -- the transfer of capital from dying firms to growing firms. All taxes provide a disincentive and distort decisions, but this one would have terrible unintended consequences.

I understand that capital markets don't always work how we would like them. They certainly haven't recently. But people make a huge mistake when they point out the imperfection of markets and then provide government as an answer because government, as everybody would acknowledge, is seriously flawed as well. New regulation needs to happen, but I haven't seen many good ideas yet, and the amount of focus on Gramm-Leach-Biley only adds to my suspicion. But a financial transaction tax would be the WORST possible idea.