It's really quite amazing how bad public policy keeps being presented as if it's something new, vibrant and wondrous. This does indeed apply to both sides of the aisle. Just to insist, it is is not true, always, that cutting a a tax rate leads to more revenue being collected. The idea of the Laffer Curve is that this is true at some tax rates and not at others. That's why it's a curve, not a straight line. And then on to today's news: this idea that Elizabeth Warren put forward, again, in a speech today, this idea of a financial transactions tax. My apologies to those who wish to stick it to Wall Street but this is an idea that really, really, just doesn't work. So why is it that so many people keep advancing it?
Please do note that I say this as someone whose one and only published and peer reviewed paper is on this very point. And the answer is that, as best we know, an FTT, a financial transactions tax, what is sometimes called the Robin Hood Tax, will actually reduce total tax revenue, not increase it. And, if we're to be serious about it, that's not a great recommendation for a new tax, that we get less money to spend on poor people by having it.
Here's a report of Elizabeth Warren's speech:
Among specific legislative steps Warren wants to see, she said Congress should impose a tax on every financial transaction, a policy embraced in Europe and by some fellow Democrats. She argued such a step would kill high-frequency traders who rely on “gimmicks that add no value to the economy” to turn a profit.
Well, that's arguable. HFT does reduce the spread between the bid and ask prices on the markets where there is HFT. This means that people trading on such markets (like the funds that your and my pensions are in, for example, or even us if we're playing directly) spend less money with Wall Street when we invest or change our investments.
OK, maybe I'm a bit strange but I think that me having more of my money and Wall Street having less of it is an addition to the economy. Even if it's only an addition to my economy rather than the gross one. And it's worth pointing out that Goldman Sachs, a few years back, paid $8 billion for an equities market maker. Which they subsequently closed, with a final value of zero, because HFT had so eroded the margins that market makers could earn in the US stock market. That $8 billion of value being now, of course, something that accrues to the people who buy and sell stocks, rather than the people that stocks are bought and sold through.
A slightly earlier report on Warren's thinking on this:
Speaking at the at Bard College’s Levy Economics Institute, Warren presented her view of what is needed for continuing financial reforms beyond the Dodd-Frank Act. Among her ideas, many of which have been pitched in the past by others: a financial transaction tax to restrain high-frequency trading...
There is, of course, the argument that certain eurozone (no, it is not "Europe," it is certain countries in the euro) countries have agreed to have such an FTT. And forgive me for being such a stickler for the scientific method but the correct reaction to that is not "Lets do the same!" it is in fact "Hey, let's see how it works out!" Umm, maybe it should be question mark rather than exclamation point at the end of that sentence.
Which brings me to two things. We've had one recent Nobel Laureate in Economics whose Nobel was for the study of taxation systems. That's Sir John Mirrlees (along with Peter Diamond). And one of the points that they make is that transactions taxes, taxes like the FTT, are a really, really bad idea. It's entirely fine to try to tax the financial sector more (I don't know about Diamond but Mirrlees would think it OK) but the way to do that is through a consumption tax (like sales tax, or VAT) not a transactions tax. So, we've theory against Warren's idea.
And then there's that one single peer reviewed paper I've ever done. An early version of which is here:
There are several problems with the tax itself: it won't reduce volatility, a desired aim, it will increase it. Banks won't be paying the charge because corporations don't pay taxes, only people do. The pain and grief it causes to those who will pay it will be more than the revenue raised. But more than all of these, there's one really large problem that no one seems to have noticed yet - there just won't be any extra money to spend.
That's right, we've all these people licking their lips at being able to spend more of our money and there just won't be any more of our money for them to spend: there will be less.
The secret to this comes from the EU Commission's own attempt to persuade us that tens of billions can be taken out of the system without anyone noticing. They report that such a tax would raise 0.1% of GDP in revenues but would lower GDP by 1.76% while it did so. It's a reasonable rule of thumb that 40-50% of the marginal changes in GDP consist of tax revenues. So, if we reduce GDP by 1.76%, we reduce tax revenues by 0.7-0.9% of GDP. In return we get tax revenues of 0.1% of GDP.
These are, recall, the EU's own numbers, not those made up by some neo-liberal (I prefer realist) like me.
This is rather a serious problem for the argument in favour of a new tax. Not only won't it raise any revenue, nor solve any of the perceived problems that it's aimed at, but it will actually blow a hole in current tax revenues - leaving us with decidedly less money, not more, to do good things for poor people.
I'm all for the idea that we shaft the people who shaft us through the financial and tax system. But what Elizabeth Warren is proposing is this financial transactions tax. Something that will cost us, the people, more money and also, at the same time, reduce the amount of tax revenues that the government can collect to spend upon us, the people.
This just doesn't sound like something sensible to do: which leaves the problem that, assuming that Warren is a sensible person (hey, she's been a professor and all, at a serious university), well, why on Earth is she proposing this policy that makes us all poorer? For I really don't think that a point or a purpose of public policy is to make you and me, the citizenry, poorer.
Also on Forbes:
