Yesterday, The New York Times editorial board called for transaction taxes on trading financial instruments. Hillary Clinton and Bernie Sanders favor transaction taxes.
They are dumber than I thought.
The Liberal solution to a problem is always more government spending, a government program, and a tax to pay for it. I can forgive them sometimes for their misguided thought process and framing because many of the solutions seem really logical. Rarely do they work.
The New York Times has never been good at math, and proposing a transaction tax shows they still don’t know how to add, subtract, multiply or divide. It is intuitively obvious to even the most casual of observer that they have absolutely zero experience when it comes to markets as well. Neither does any political candidate that supports a transaction tax.
Locally, Representative Jan Schakowsky has advocated for a transaction tax and thankfully there is a good alternative in Joan McCarthy Lasonde. Ironically, there are a lot of people that owe their living to the financial community in that district. Hopefully they will turn out and vote for Joan.
There are certainly times when a government needs to flex its muscles and step in to take care of problems. Anyone can tick off a couple. But, in this case there is no rationale for levying a tax except populist anger and wanting more revenue to pay for stuff that isn’t useful in the first place.
The tax won’t work and will hurt little people a lot worse than it will hurt big market players.
Let me tick off just some of the reasons why the NYT editorial board is so misguided.
- They propose a small tax. All taxes start small. They never stay small. Here is a quote from the last paragraph of the essay, “setting the tax rate low at first, and raising it gradually, would help avoid potential damage.” Taxes also have effects not quantified in the accounting that is used to support them. For example, the NYT says $66 billion could be generated from a small tax. What about the smaller pool of liquidity that will result from the tax? That will make markets less liquid, and cause even more slippage to orders. The true economic cost (which is hidden) of the tax to governments, pension funds, individuals, banks, hedge funds, HFT firms and other people trading will be in the trillions of dollars.
- The NYT proposes the tax because every other country is doing it. It reminds me of my parents when I used to try and persuade them to get something because a friend had it. “If Johnny jumps off a bridge, are you going to do that too?” Foreign markets are no where near as robust as the American market place. They aren’t as innovative, and they are most certainly not as diverse. One of the strengths of the American marketplace is its diversity of traders. The EU doesn’t have a lot of independent traders. They are mostly bank traders. A tax will limit competition, and kill diversity in the US. Are you a minority or a woman that wants to try financial trading for a living? Are you entrepreneurial and want to try and support yourself trading? Your hill just got a lot higher to climb.
- The NYT makes the point that pension funds don’t use hedge funds as much today as they used to. They don’t. So what? It’s a free market and pension funds might go back to using hedge funds if they see it as an asset class that has potential for them. A tax puts a wrench in the risk/reward math. I bet we could find thousands of editorials in the NYT about how we have to save more for retirement, take care of government employees, and support unions. Transaction taxes hurt all of those groups.
- The tax isn’t borne just by the traders. The tax is shouldered by the American public. The tax will make it more expensive for producers and consumers to manage risk. That cost will be passed directly on to the market. It might only be .05-.20 cents on products that have exposure to grain. When you think about all the grocery products that have exposure to grain, the tax adds a lot of money to the average grocery bill quickly.
- In the startup community, people are debating whether firms should stay private, or go public. I think it’s better for the American economy, American people and the firms to be public sooner rather than later. Having a transaction tax makes it more expensive for them to go public. That limits investment opportunity and wealth building opportunity for average Americans.
The financial industry will eliminate jobs because of the tax. A small tax doesn’t seem like a lot but when you are trading trillions of dollars every day it does. The initial jobs that get eliminated will be the lower level jobs where people start. This tax will extinguish opportunity for young people entering the industry.
A transaction tax is a totally sexy idea to someone that is not familiar to markets. But, once enacted they will become very familiar with it as all kinds of bills go up; from the grocery to the fees banks charge them to handle money. Basically, anywhere they transact business will be more expensive.
Thanks for the link Instapundit
Thanks for the link Doug Ross.
I should have added that public companies use the capital markets to raise capital for operations and expansion. A transaction tax makes accessing these markets significantly more expensive. That hurts GDP growth, potentially increases unemployment, and continues to make America less competitive.