Dean Baker on Financial Transaction Tax

Dean Baker on BloombergBloomberg is really pushing the frontiers in journalism. In order to give readers a balanced account of a proposal by Representative Peter DeFazio to impose a 0.03 percent tax on financial transactions (that’s 3 cents on every hundred dollars) it went to the spokesperson for the Investment Company Institute, the chief investment officer from Vanguard, and an academic with extensive ties to the financial industry. It also presented an assertion on the savings from electronic trading from Markit Ltd. Based on this diverse range of sources, Bloomberg ran a headline: “Democrats assail Wall Street with plan that may hit mom and pop.” …

Most research finds that trading is price elastic, meaning that the percentage change in trading in response to a tax is larger than the percentage increase in trading costs that result from the tax. The non-partisan Tax Policy Center assumed an elasticity of -1.25 in its analysis of financial transactions taxes.

This means that if the tax proposed by DeFazio would raise the cost of trading by 20 percent, then trading volume would decline by 1.25 times as much, or 25 percent. Investors would pay 20 percent more on each trade, but would be trading 25 percent less. This means that their trading costs would actually fall as a result of the tax…

The only way “mom and pop” get hurt in this story is if they make money on average on their trades. That is a hard story to tell. If mom and pop are lucky and sell their stock when it is high then some other mom and pop are unlucky and buy the stock when it is over-valued. As a general rule, trading will end up being a wash…

Of course there is someone that gets hurt by less trading — the folks who were making money on the trades — that’s right: the financial industry… Since it may not sound very compelling to hear a multi-millionaire complain about the prospect of a pay cut, it sounds much better to make up a story about mom and pop investors.

—Dean Baker
Bloomberg Asks Wall Street How It Feels About Taxing Wall Street

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