Transaction Tax Again

Posted by Jeff Carter
on October 18th, 2010

The transaction tax is an idea that politicos and bureaucrats float all the time. It’s one of the dumbest ideas I have ever seen as far as economic incentives are concerned. It’s also one of the dumbest tax ideas floated as far as competitiveness is concerned.

Year over year, the idea makes its way into every Presidential budget and year after year it gets written out. Politicians in Europe wanted a bank tax. Dumb. Here is a video explaining a bank tax.

Since it’s election season and virtually every government is under fiscal assault, politicians are having to come up with new ideas with regard to spending. Most politicians don’t want to curb spending and employ policies for growth, because spending grows their powerbase.

Jan Schakowsky, running for re-election in Illinois 9th Congressional District signed on to a transaction tax earlier this year. What a dumb idea. Not to mention that it will chase billions of dollars out of the Chicago economy, and cost the state (and country thousands of jobs). Joel Pollack is running against her.

Meanwhile, state and local pols are no smarter. I had an email exchange with a Democratic candidate for Lt. Gov that wanted to tax transactions. Fortunately, he lost. Now comes this gem from Maria Owens, candidate for 95th District Representative.
“Passionate about keeping tax increases away from the middle class, Owens said there should be a transaction tax placed on the Board of Trade, Chicago Mercantile Exchange and the Chicago Board Options Exchange.

The 1 to 3 cent tax would be placed on all trades and is expected to drive in billions of dollars over a five-year period, she said.”

It’s as if Homer Simpson is running for government. Ms. Owens hasn’t had a class in economic incentives and it’s doubtful she has traded for fun and profit.

A transaction tax is a tax on liquidity. Want less liquidity? Tax markets. Second, pension funds will get hurt the worst. Not only will spreads be wider, but when they want to unload positions, they will have to pay a tax on it! A tax creates what economists call, “more friction” in the market.

Remember why markets exist. To raise corporate capital, to transfer risk, to create wealth. Transaction taxes inhibit all three so if you are for transaction taxes you are against everything else. You are also against free markets, which to me means you are a socialist. Want to be a socialist? Move to Europe.

Second, if Illinois passed the tax, the CME Group and CBOE would immediately move their corporate headquarters out of state. This stuff isn’t done in a vacuum. The trading floors would be shuttered and thousands of homes would be for sale as traders and employees fled the state.

How is that tax working out now?

Additionally, several traders would simply quit. One year I did the math. Washington wanted to impose a .05 cent transaction tax on me. I figured that tax would cost me $250,000 per year. Given the risk/reward on trading anyway, that type of onerous tax puts independent traders out of business.

Investment banks would also pay the tax. Won’t it be great to hit a company like Citibank up for a transaction tax? Gee, we might be able to bankrupt them again.

The CME Eurodollar contract is where most of the US mortgages are hedged. Without it, say goodbye to adjustable rate mortgages. That contract would not exist if there was a transaction tax. This transaction tax Ms. Schakowsky supports on a national level, and Ms. Owens supports on a local level, would kill an already weak housing market. The housing market makes up about 6% of American jobs. Essentially, advocates of this tax want to gut the American economy.

Why is it that politicians can never really cut or slash budgets? They “freeze spending”. How about an outright, “Sorry Mr. Constituent, we can’t afford that crap so it’s being eliminated.”? Ms. Owens probably hasn’t met a single spending program she doesn’t like.

Vote any politician of either party out of office that wants a transaction tax. It’s bad for business, bad for the general public, and bad for America.

tip of the hat to Take A Report

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