Trading Tax to Pay for Job Creation?
Traders Magazine Online News, October 15, 2009
"A financial transaction tax," Mishel told lawmakers, "seems an entirely sensible vehicle to provide the revenues we need to support federal spending and for offsetting the costs of the current jobs package."
Still, Aite's Zubulake also objected that the 10 to 25 basis points would be "disastrous." It would drive some liquidity providers out of the business, namely the high-frequency kind, or send business offshore, he predicted.
A 2003 study by the International Monetary Fund found the imposition of a transaction tax hurt Swedish brokerages in the 1980s. The tax was later abolished by the Swedish parliament in 1991.
"The Swedish experience highlights the following points," according to the study, "Securities Transaction Taxes and Financial Markets." First, investors go offshore to avoid the tax, the IMF wrote.
"Second, markets suffer greatly following the imposition of the tax. Even very low tax rates on fixed-income instruments led to an 85 percent decline in volume in the first week the tax was imposed compared to the pre-tax average. Third, after removal of the tax, the trading volume gradually comes back across all previously taxed assets," according to the study.
Zubulake also contended that trading volume would decline if a trading tax were imposed at the suggested rates. Many dealers, he added, would find it uneconomic to provide liquidity.
"They might live with a penny tax, but a dime will kill many of them," Zubulake warned. "They'll go elsewhere." With fewer liquidity providers, he argued, the average retail investor will find costs going up, he added.
Still, trade industry lobbyists questioned if this tax idea is a serious one. They were very confident that once again the securities transaction tax plan would be easily defeated.
"We've beaten this back a number of times and we expect to do so again," said a securities industry lobbyist who didn't want to be quoted by name.
But Zubulake wasn't so sure and suggested that some might be overconfident.
"In this kind of anti-Wall Street environment," he warned, "it's just possible that this kind of tax could pass."
