The Failure of a Tobin Tax

[Toro]

The Tobin Tax is a very bad idea.

“Quite frankly, I bet nobody would even feel it,” the Iowa Democrat said on Tuesday in relation to his plan to introduce a US financial transaction tax.

Nonsense, says Tabb Group’s Adam Sussman:

Three basis points doesn’t sound like a lot, right? Certainly for those in the Beltway who have managed to run up the U.S. national debt to $15 trillion, three basis points can feel like small potatoes.

But you really have to wonder if anyone over there bothered to do the simple math when they were cooking up the scheme to take the Europeans’ lead and propose their very own financial transaction tax (FTT) for the U.S. Based on value-traded figures for 2010, in U.S. cash equities alone, the financial tax would have generated $17.6 billion in revenue.
​

Brief recap: Senator Harkin and Representative Peter DeFazio, on Wednesday introduced bills in their respective chambers that would impose a transaction tax on financial firms. The pair proposed a 0.03 per cent tax on stock, bond and derivative trades that would come into effect in 2013 and would apply to every US investor.

So, 0.03 per cent = $17.6bn. Are you feeling that?

Here are those numbers in perspective via Sussman:

• The FTT is nearly two times the annual amount U.S. mutual funds and asset managers pay to their institutional brokers.
• The FTT is three times the annual amount high frequency traders generate.
• Mutual funds and other asset management investors would pay approximately $1.9 billion annually. In other words, explicit transaction fees would jump 22 per cent.
• Implicit transaction fees would skyrocket as liquidity providers (yes, including high frequency traders) either widen the bid/ask spread or quit the business altogether.
• ETFs would be doubly impacted. Once on the trades in the creation/redemption process and will then the trades on the ETF.

FT Alphaville » Would you feel three basis points?

 

[zzzz]

Trickle down economics. No matter what they charge it trickles down. The companies (people) with money will always pass on higher expenses to the consumer and continue to make a profit.

 

[Toro]

A little history lesson is in order. While early markets—even in the United States—had transaction taxes, they’ve been largely abandoned by the industrialized world, as most regulators have come to realize that they are both hard to implement and rarely effective.

Worse, they can have disastrous knock-on effects.

Swedish Disaster

The best-known example comes from Europe—or Sweden, to be exact—which probably explains why the European proposal has met with such strong opposition. From 1984 to 1991, Sweden implemented a series of taxes ranging from 0.5 percent on equities to fractional basis points on certain bond trades.

The results were disastrous. As any sane person might expect, trading volumes plummeted in Sweden as investors moved their money to more lubricated markets. Within six years, the options market vanished entirely, futures volumes fell 98 percent, and 50 percent of equity trading moved offshore. Even bonds, which had fractional basis-point taxes, suffered an 85 percent reduction in trading volume.

That was in the late ‘80s, when global markets were smaller and much less liquid than they are today.

You need only look at the relative ease with which savvy futures traders move their exposure between ICE futures, CME futures and negotiated swaps to imagine what might happen today. Investors will vote with their feet, and exchanges like NYSE Euronext and ICE have made clear that they will vote with their feet too if transaction taxes are imposed in Europe in a serious way. ...

Trading Tax: Dumb And Dumber

 

[Sheldon]

Trickle down economics. No matter what they charge it trickles down. The companies (people) with money will always pass on higher expenses to the consumer and continue to make a profit.

Yeah to an extent. If they pass down too much shit they could end up reducing potential profit as people vote with their money elsewhere. We're seeing that with large banks bleeding customers because of the Fed's limit on interchange fees. They might have to start eating some of those expenses.