Tax on Trades Should Be Part of Rescue Plan, Some Democrats Say

Yep, seasideheights got it right. Look up Tobin tax in wikipedia.

 

I have scanned parts of the second paper. It does appear that the proposals for a
transaction tax that are currently floating around may have originated in part from
this paper. They use the acronym “STET” for “Security Transaction Excise Tax.” I do
not agree with the authors, but it might be best for all here to know what we are up
against. Here is some of what they say:

“General arguments in behalf of STETs have been made before, initially by
Keynes in the General Theory [1936], and recently by, among others, Summers and
Summers [1989] and Stiglitz [1989].”

“Once design problems are solved, we are then able to show that, for the U.S. case,
the revenue potential of a STET is formidable --on the order of $70 - 100 billion a
year, or about five percent of total federal government outlays--even if one allows
for declines in trading volume up to an implausible 50 percent of existing levels.
Of course, assuming the STET is designed well, such substantial increases in
government revenue will be accompanied by a decline in short-term speculative trading,
and thus an increase in the government's ability to handle macroeconomic problems
resulting from unstable financial markets.”

“As a first principle, then, the case for a STET must flow out of a critique of the
efficient markets perspective. Critics of course still recognize the social benefits
of being able to easily trade in markets for existing assets. At the same time,
enhancing the liquidity of assets also creates problems for the functioning of the
economy. Fundamentally, these problems flow from the fact that highly liquid
financial markets promote speculative trading practices that distort pricing,
resource allocation and investment, creating imbalances between financial and real
activity, and thereby contributing to macroeconomic instability. As such, excessive
speculative financial trading is a form of unproductive activity in precisely the
sense of Bhagwati’s [1982] notion of “directly unproductive profit seeking,” by which
he means activities that may be privately profitable but do not directly increase the
flow of goods and services.”

“... no statistical evidence at all exists to support the claim that countries will
enjoy faster economic growth through operating more liquid stock markets.”

“Overall then, according to these critical perspectives, thick but unregulated
financial markets operate inefficiently and irrationally.”

“... over the course of a business cycle, volatility is affected by three partially
independent influences: the underlying behavior of the nonfinancial economy; the herd
behavior of financial market participants; and the attempt to dig out of financial
crises once they have already occurred. The first two sources of volatility should
be moderated through a decline in the liquidity of financial markets, and thus by a
STET. However, the third source of volatility would be exacerbated by a decline in
market liquidity. This is because more liquidity in the short-term is precisely what
financial market participants need to prevent an interactive debt deflation. Thus,
in the midst of a crisis situation, the policy intervention needed is lender-of-last-
resort intervention, not a STET.”

“At the same time, the ability of lender-of-last-resort interventions to neutralize
speculative financial herds is greater when the size of the herd is smaller. … Thus,
when a currency market crisis breaks out, the fact that a STET has reduced the
market's liquidity may not directly reduce volatility. But it will have contributed
toward stabilizing the market if, over a longer time-framework, it reduced the size
of the market and thus enabled the market-maker to exert greater influence during a
crisis.”

“The tax should apply to all trades and transfers. This would include trades by
specialty brokers and market makers.”

“To maintain the principle of broadest possible applicability, we propose that the
U.S. STET apply to all traders in U.S. financial markets of both domestic and foreign
residents. … Further, the tax would apply equally to foreign transactions of U.S.
nationals and corporations, … Finally, the U.S. STET would apply to trades of U.S.
securities by foreigners in non U.S. markets. Even though such trades take place
outside U.S. jurisdiction, holding a legal claim on the asset and income stream
generated by it would still require legal endorsement within the U.S.”

“We begin with a benchmark that the two-sided tax rate on trading equities will be
0.5 percent, so that each party to the trade pays 0.25 percent. … The 0.5 percent
rate on equities then becomes our benchmark for establishing rates in other markets
in a way that minimizes distortions. Our proposal is to scale the two-sided tax rate
on other financial instruments as follows:

Bonds--0.01 percent per each year until bond's maturity
Futures--0.02 percent of the notional value of underlying asset
Options--0.5 percent of the premium paid for the option
Interest Rate Swaps--0.02 percent per each year until maturity of swap agreement.”

“Our proposed STET would tax all government debt--federal, state, municipal and
other--at a rate identical to that of private debt.”

“Working from this Japanese model, we propose to operate from an initial rate of
0.002 percent of notional value.” [on futures transactions]

“Table 5 … shows a range of estimates of transaction costs in 11 different futures
markets. … the mean low figure, a one-way cost of 0.0184 [percent] of notional
value, is more than three times smaller than the mean one-way high of 0.0589
[percent]. … But for our purposes, the main finding is that our proposed two-way tax
rate of 0.02 percent of notional value is well inside the existing transaction cost
structure of the futures market. Our proposed tax rate would amount to roughly
5 percent of the mean one-way low estimate for these 11 markets, and 1.5 percent of
the mean one-way high estimate.”

It is not clear what tax rate the authors are proposing for futures. They say 0.02%
of notional value, then they say 0.002%, then they say 0.02% again in a context where
it appears they mean 0.002% (since 5% of 0.0184 is approximately 0.001, and 1.5% of
0.0589 is approximately 0.001). I think they meant 0.002%. At today’s close for the
December ES contract, which was 1168.50, the notional value would be $58425. At a
0.002% rate, the round-turn tax would be $1.1685.

 

"Further, the tax would apply equally to foreign transactions of U.S.
nationals and corporations,"

Good luck guys, they're really trying to screw everyone of you... Glad I am not american for one time... This is fucking crazy... You need to act against those fuckers...

 

There is a lot of guys here talking about trading offshore (if there is a tax). Do you know that Americans are not allowed to own foreign stocks? I have deposited money in a lot of hedgefunds and mutual funs and all of them explicitly states that Americans can't subscribe.
(I'm not American).

You even have to pay taxes to IRS as long you're a citizen, even though you never visit the US. Not what I call "land of the free".

 

We know we're free because they keep telling us we are.

 

Anyone else get a reply from their broker? Here was IB's reply. Basically: yes, we know about it, no we're not doing anything about it right now because it's not like they've got their Wall Street listening ears on anyway. Okay, so that was me embellishing. Here's the email:

Ms xxxx,

We are aware of this but do not believe that it is currently at a stage where public and/or industry response is either open for solicitation or warranted. Should a formal proposal be put forth there would likely be a concerted effort to address this through industry organizations such as the Securities Industry Association and Futures Industry Association which IB is a member of along with the impacted exchanges.

Regards,
IB

 

I just want to make a comment about whether the politicians are serious about this or not. I believe some of them are very serious about it and others are just listening. It is more then likely not going to be in the 700b bail out bill. But from what I've heard and read it will be brought up again and given much consideration by congress. Just last night on Larry King there was some independent lady touting this trans tax to recoup the tax payers money. Unfortunately right now us traders as a group are mostly seen as greedy, selfish, non-contributing members of society and that we are to blame for this economic mess. So if this trans tax doesn't pass it sure seems like something will pass to make it more costly for us short term traders to trade. They are clearly wrong in their thinking but with the whole country despising Wall Street right now we may have a lot of head wind in front of us.

 

Is there something in the current rescue proposal regarding a recoupment process after 5 years or so? I thought I heard a commentator bring this up last night.

I know Obama mentioned something about a fee on firms after 5 years or so if the taxpayers don't get their money back (those might not be his exact words) but it didn't sound like a transaction tax but a penality fee on specific firms...

Anyone clarify?

-Guru

 

Eric, oh, definitely, totally agree. I'm just not sure what I can do about it. Like I joked about, they're not in the listening mood.

 

>>We are aware of this but do not believe that it is currently at a stage where public and/or industry response is either open for solicitation or warranted. >>

Straight talk: The government is not asking for your opinion. Shut up and pay your taxes.

Susannah, nothing you CAN do about it. Except start thinking about how to explain to your kids how socialism began in the USA.