Time for a ‘speculation tax’ on speculative high-frequency trading


Posted by AzBlueMeanie:

Ralph Nader wrote an opinion in the Washington Post back on November 30, advocating for — as he has for years — a transaction tax (aka speculation tax) on stock trades. Ralph Nader on a simple way to avoid the fiscal cliff: Tax stock trades:

Wall.StreetA financial transaction tax would apply to purchases and sales of
derivatives, options and stocks. The tax would be small, half a penny or
less on each dollar of the transaction value, depending on the product.
This idea is often called a “speculation tax,”
because it would hit
hardest at frothy high-volume trading as opposed to sober long-term

Wall Street might object, but taxing its sales is hardly a radical idea. Americans in all but five states pay state sales taxes, ranging as high as 7 percent,
every time they buy a car, an appliance, a pair of pants or piece of
furniture, but a trader on Wall Street can buy and sell millions of
dollars’ worth of financial products each day without paying a cent in
sales taxes
. A teacher or police officer who buys a $100 pair of shoes
in the District or Maryland pays $6 in sales taxes. Meanwhile, if a
financial speculation tax were applied to stock trades at a rate of 0.25
percent, a day trader would pay just 25 cents on every $100 worth of
stock bought

A speculation tax isn’t a new idea, either. Congress
enacted one in 1914, and it remained in effect until 1966
; initially it
imposed a tax of 2 cents on every $100 sale or transfer of stock. The
late Nobel Prize-winning economist James Tobin proposed a version to
curb foreign exchange speculation in the 1970s.

* * *

It is an idea whose time has come once again.

* * *

According to a joint report
from the Center for Economic and Policy Research and the Political
Economy Research Institute, a speculation tax could raise as much as
$350 billion annually
. Even if we make the unrealistic assumption that
such a tax would reduce trading volume on the stock market by half, it
could still boost federal revenue by $175 billion a year.

* * *

As if its deficit-reducing potential weren’t enough, a financial
transaction tax could reduce risky speculative trading that diverts
resources from productive economic activity and can be very
destabilizing, as the 2008-2009 crash demonstrated
. In fact, this
summer, more than 50 financial industry professionals, including past
and present executives from Goldman Sachs, JPMorgan Chaseand Morgan
Stanley, signed a letter
to the Group of 20 and European leaders supporting a speculation tax
They pointed out that financial market activity has skyrocketed in the
past few decades: The value of transactions is now 70 times greater than
the size of the real global economy. Trading volume has grown
exponentially, skyrocketing from 188 billion shares of stock traded on
the Nasdaq and the New York Stock Exchange in 1995 to nearly 1 trillion
in 2011. Each year, the notional value of over-the-counter derivatives
traded worldwide totals trillions more.

In their letter, these professionals cautioned that although
the main purpose of financial markets is to raise investment capital,
allocate resources efficiently and mitigate risk, today’s markets, full
of computer-driven, high-frequency trading, often undermine those goals.

The Capital Institute’s John Fullerton, a former managing director at
JPMorgan, has estimated that nearly 70 percent of equity-trading volume
is composed of these types of speculative strategies.

* * *

[Critics claim] that a speculation tax would drive trading and wealth to offshore tax
havens. However, this argument ignores the fact that Britain already
subjects stock trades to a financial transaction tax, which generates
billions every year. Forty countries had such a tax in place in 2011.

Germany and France have voiced support for implementing one across the
European Union.

Other critics claim that a speculation tax would harm ordinary investors. Jon Green at Americablog.com offers an innovative solution to this legitimate concern. Tax gambling on Wall Street to avoid fiscal cliff:

I agree in principle, but I have a slightly different solution.

If Wall Street were solely comprised of billionaires looting
and gaming the system at the expense of everyone else, I’d be inclined
to agree. But a sales tax on ALL transactions might affect plenty of
people that we’d rather not tax.

* * *

Avoid the Fiscal Cliff by Redefining the Difference Between Long-term and Short-term Capital Gains

Tax capital gains on stock at 99 percent for stock held less than one
[i.e., automated high-frequency trading]. Gradually reduce the rate the longer the stock is held, ending
with gains being taxed as regular income after the stock is held for at
least a year.

Currently capital gains are taxed at different rates
depending on how long the stock is held, but the rates are structured
in a way that still rewards gambling. Redefining the difference in this
fashion would effectively eliminate the incentive for flash trading
and would guarantee that Mitt Romney pays a higher tax rate than his secretary.

This could arguably amount to a larger tax increase than Gaius is
proposing, but, unlike a blanket sales tax on all transactions, only
affects transactions that lead to a profit
. Getting taxed after selling a
stock for a loss seems too much like adding insult to injury.

Wall Street in and of itself did not cause the crash; gambling with other people’s money
on Wall Street caused the crash. There’s a way to take the incentive to
gamble away, and generate revenue, without punishing those who are
actually interested in investing long-term with a company.

Disincentivizing speculative trading by automated high-frequency trading and regulating the largely unregulated "shadow markets" trading in derivatives and other exotic speculative investments would rein in the casino capitalism of Wall Street that is all about maximizing wealth (on paper) by get rich quick schemes that nearly destroyed the financial system and the world's economy. This type of destructive behavior should be discouraged.

Rather, we should incentivize traditional long-term investment strategies in brick and mortar businesses, expanding markets, and job creation. The tax code should reward this type of long-term investment.