November 8, 2015
As Congress looks for ways to close the budget deficit, and Democratic presidential candidates search for ways to finance proposed new government programs, one option keeps coming up: imposing a financial transactions tax (FTT). This misguided idea has populist appeal as a way to make Wall Street pay their “fair share” of taxes, but it would slow the economy, resulting in lower tax revenue.
An FTT is a small (generally less than half of one percent) tax on purchases of financial instruments. Say the government imposed an FTT of 0.5 percent, as Senator Bernie Sanders has proposed. If you buy a stock for $100, you would have to pay fifty cents in tax. Sanders wants to use the tax to finance free tuition at public universities, and it is also a major component of the financing plan for a Medicare-for-all program proposed by House Democrats.
In addition to the government revenue it would generate, proponents see the FTT as a way to reduce market volatility. High-frequency traders who move trillions of dollars through the financial system would get hit hard by even a small FTT. This, in proponents’ eyes, would stabilize markets by disincentivizing high-frequency trading.
But these dual objectives of the FTT represent a sort of doublethink. In order to reduce high-frequency trading, the FTT would have to reduce trading volume. (High-frequency trading comprises up to 84 percent of financial transactions.) But putting a significant dent in high-frequency trading would also reduce the FTT’s revenues. Fewer trades mean fewer taxes.
Read the full article at Economics 21: Financial Transactions Tax Would Lower Incomes and Lose Revenue