The Robin Hood Tax – The Congressional Budget Office agrees with blogpackinglight

While it’s not my intention to turn this blog into an economics blog, a lot of my readers have expressed an interest in economic matters, particularly where comment from the mainstream media is deficient. My last post on the “Robin Hood Tax” (Financial Transactions Tax/Tobin Tax), garnered some favourable comments. To show that it’s not just little old me, below I produce some commentary that appeared on the Zero Hedge website today on a recent US Congressional Budget Office report on the impacts of a Tobin Tax.

I think the implications are obvious in terms of the recent spat in the EU. If the EU imposes a Tobin Tax, most of the transactions will migrate to New York. London property prices would collapse. The UK banking system would implode and the UK would face a depression. Perhaps that’s what Sarkozy and Merkel really want.

Next time someone in the pub spouts on about what a great idea a Robin Hood Tax is, you might want to politely point out that the idea doesn’t even get past first base. Anywhere or anyhow.

From Zero Hedge:

CBO on Tobin Tax – “Don’t do it!’

The Congressional Budget Office (CBO) explored the consequences of a Tobin tax, after it was asked to throw in its two cents in regarding proposed legislation, H.R. 3313 / S. 1787. The proposed new law has a very catchy title:

 “Wall Street Trading and Speculators Tax Act”

 Who wouldn’t like something like that? For a country that (A) is desperate for revenue and (B) whose populous hates financial fat cats, speculators, monstrously paid bankers, and ridiculously paid hedge fund execs, a transaction tax is an easy sell.

 I’ve taken grief on these pages with my position that taxes are a necessity. “Zero” is not the right number. The only questions are who pays and how much. With that said, it’s hard for me to push against a transaction tax. But I’m against this. The costs will outweigh any benefits that are created. I think the CBO agrees. Some bits from the report (Link):

 For a transaction involving a stock, bond, or other debt obligation, the tax would be 0.03 percent of the value of the security.

 Gee! Only .03%! Hardly worth noticing! Actually it is. Based on recent turnover the cost of the tax would be $1.7mm every day for those trading AAPL. For GE and BAC, it comes to a rake of $327k and $425k, respectively. That’s real money.

 The argument will be put forth that the tax is only a few pennies. A long-term buyer of AAPL would have to pay a total of only 24 cents to buy/hold/sell a share. For BAC, it’s only 3/8th of a cent (.0032).

 The transaction tax on Government bonds will only be applied to maturities over 100 days and not applicable to any new issuance. So if you were looking to park $100k in T notes for a year, you could avoid the tax by participating in the government’s auctions. That’s stupid. No one will do that. People will call their brokers and it will cost them an extra 30 bucks to own the Note.

 The US bond market is very complex. It has nothing to do with retail demand. A substantial portion of the $10T of Treasury plus $7T of Agency paper is in perpetual float. I estimate that at least one-third of the outstandings have no permanent home. It sloshes about the globe based on a variety of macro forces. How many times do they “slosh” in a year? Much more than you might think. The number is a minimum of 5Xs. (I think it is around 7Xs, it could be as high as 10Xs) Using the low estimate, the annual float turnover impacted by the tax equals $25T. That teeny weeny tax would therefore suck $8 billion out of the market. That’s a very big deal. The CBO sees this pretty clearly:

 Securities that are traded frequently, such as Treasury securities, would be more affected than securities that are traded less frequently.

 The proposed transaction tax would lay waste to the HFT (High Frequency Trading) crowd. Their spreads are far too small and their volumes too high, to not have their business models get crushed by a Tobin tax. Many will cheer, myself included. But a sudden death of the algo computers would be very destructive.

 The tax would also decrease the volume of transactions and would make some types of trading activity—such as derivatives transactions to manage risk and computer-assisted high-frequency trading—unprofitable.

 This is about the money and how much one keeps. So every effort will be made to divert trading activities outside of US tax jurisdictions.

 Traders would have incentives to avoid the tax either by trading offshore or by creating new financial instruments that were not subject to the tax.

 As the trading activity goes outside of our borders, so will all those traders and their high paying jobs. Also would go the thousands of back office/ support staff that goes with this.

 As foreign holders of U.S. securities moved their transactions abroad, more of the market could go with them, which could diminish the importance of the United States as a major global financial market

 All taxes have consequences. A Tobin transaction tax would be no exception:

 In the short term, imposing the transaction tax would probably reduce output and employment.

 Beyond the first few years the tax’s net impact on the economy is unclear.

 Unclear? This is pretty clear:

 The transaction tax would raise the costs of financing investments to the extent that it made transactions more expensive, financial markets less liquid, and management of financial risk more costly.

 A net change in the amount of investment would in turn affect GDP and employment. In the short term, a decrease in investment would lower demand for goods and services and thus reduce output and employment.

 Reduce output and employment? Just what we need.

 These consequences are not the ones that worry me. I’m concerned with liquidity. What will happen when 50% of short-term trading is eliminated? The CBO has an answer for that:

 The tax might discourage short-term speculation, which can destabilize markets and lead to disruptive events (such as the October 1987 stock market crash and the more recent “flash crash,” when the stock market temporarily plunged on May 6, 2010)

 How might the markets welcome a transaction tax? I say this would get a huge thumb’s down. If you believe that wealth in 401Ks drives the economy (I do), then this will bring (another) recession. The CBO agrees, sort of.

 Initially, the transaction tax would reduce the value of existing financial assets, because investors would not be willing to pay as much for assets that had become more costly to trade. That reduction would produce an immediate—though probably small—decline in wealth for people who owned financial assets when the policy was enacted.

 Note: The CBO are a bunch of bean counters. They have not the slightest idea what the markets may do if this tax was enacted. When they say the consequence to assets values will “probably be small” they are making it up. (A Wall Street broker is not allowed to say things like this. The outcome is not predictable)

 This is not a tax on speculators and guys who wear white spats on Wall Street. This will impact all the pension and savings plans:

 The transaction tax would also affect the funding of state and local pension plans ($3 trillion as of June 2011). Besides initially reducing the value of their existing assets slightly, the tax would raise transaction costs for pension plans. Both of those effects would increase required contributions to the plans.

 Note: There’s that “slightly” thing again. Shame on the CBO for soft peddling the risks.

 I wouldn’t be surprised to see that a transaction tax becomes a political football in the next election. Obama will support it. The Republican candidate will oppose it. If the election were tomorrow, Obama would handily beat either Newt the Fool or Mitt the Suit. Unfortunately, I think a transaction tax, and all the bad things it will bring, is in our future.

Copyright: Zero Hedge


9 thoughts on “The Robin Hood Tax – The Congressional Budget Office agrees with blogpackinglight”

  1. Robin,

    Some of the ,ahem, financially and economically illiterate people that actually do support the idea of a Tobin tax (or variation thereof):

    Joseph Stiglitz
    Jeffrey Sachs
    Bill Gates

    One name will be known to most, the other two might raise a puzzled eyebrow to most but certainly not to you. You’re going against some seriously high-level opposition there and they know their onions (I doubt you win a Nobel prize that easily…).

    I like the idea of a Tobin Tax (I remember being called a “right wing twat” when I discussed about it in a pub in Manchester, in 96…no one heard of it back then, in the UK) but it’s not really workable and therefore a rather odd way to solve systemic/regulation issues in the banking sector. I’ll shoot the lot of them and start all over again but that might be a bit radical…

    PS How is it going with Ulrich Schnauss?


    1. You’re not going to everyone to agree. I’m merely putting a (strong) case against it. My initial view was that it would be relatively trivial but the more I looked at it the more persuasive the case against it. At the very least, it will not work unless every country adopts it uniformly. Even then, the other issues I’ve raised argue against it.

      The people you’ve mentioned don’t have any real financial market experience and can’t be expected to know about some of the technicalities. I’m not being an apologist for the misdemeanours of the financial sector. I’m as angry and appalled as many but a Tobin Tax will not cure the breakdown of ethics and regulation. It seems to me that this tax has been adopted as an instrument of revenge, rather than a rational response.

      It has huge unintended consequences. Ask yourself why it has never been adopted widely since it was first mooted. Also look at the experience of Sweden that I quoted.

      Simple economics always wins over politics as we are seeing in the eurozone crisis. The problem is that politicians seem to think they can overrule economics by dictat and they can’t unless you want a communist system. Even then it breaks down as we saw in the case of the USSR.

      P.S. sorry if the original answer seemed a bit aggressive it wasn’t intended to be and I’ve amended it.

      1. I can deal with a bit of robustness Robin, don’t worry and I did not see it anyway 😉

        I just wanted to put forward the case that there is no slam/dunk case when it comes to the Tobin Tax. Your position (which I neither disagree nor agree with) is very much aligned with the City and Wall Street position but there is formidable brain power behind the pro-Tobin Tax camp too, not just Guardian readers without any economics knowledge. Stiglitz and Sachs might not be involved on the frontline but they are big beasts in the economics arena, mabye at a more conceptual level shall we say. Tobin himself was no amateur either. Gates is turning into a right socialist philantropist in latter life, probably feeling guilty about all the rubbish software he inflicted on us… 😉

        The Tobin Tax proposal put forward by the Euro-core is a political instrument; correct me if I’m wrong but once we put aside entertaining but slightly batty ideas that sinking the UK is the idea, isn’t this all about putting a very tight leash on the banking sector? “Too big to fail” must not be allowed again, etc

        Revenge? Probably and on that one, the EU will have Joe Public behind them, for once. There is a very real element of anger (both amongst the public and the ruling elites) towards the US and the UK as the main instruments of the present crisis, whether this is justified is another discussion entirely.

        Music wise, I’ve ordered some oldies, Front Line Assembly and Delerium. Back in the early 90’s for me 😉

      2. The big problem with a Tobin Tax is the unintended consequences and the fact that it is ineffectual as a banking regulation tool. There are much more effective tools. There is a need to be dispassionate about policies and consider all the ramifications. Yet again politicians jump on a bandwagon without proper thought. There are also plenty of heavyweights who oppose it. Poor analysis by the policy elites are what landed us in this mess.

  2. So the financial sector would collape, and we might rebuild our economy by actualy making things again?
    Sign me up! )

    1. How would you fund anything? Without a functioning banking sector you would be back to the Middle Ages.

      The answer is to punish people like Fred Goodwin, disqualify them, take away the bonuses and pension they “earned”. The Yanks put them behind bars. So should we.

  3. Make commision illegal. Make all 3rd party lending illegal. Money can only be borrowed from banks.
    We need to get rid of all the parasites who don’t actually do anything, but take a cut of other folks money.
    I’m no economist, but i’ve bored walking companions silly by predicting this ‘crash’ for years. Basing a cpuntry’s economy on paper shuffling and poker was madness.

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