There are still too few supporters of the idea of taxing financial transactions. I still contend that if governments need to raise revenues, as they need to do it sooner or later, it's better to tax capitals rather than consumption (for instance with VAT), production or labor.
On the other hand they could fund any tax credit scheme envisaged for job creation with a simple tax on financial transactions. The latter is often called Tobin Tax, but I rather consider it a tax of Pigou (who was born before Tobin and 132 years ago on November 18th) to the extent that the existence of negative externalities of capital movements and financial trades is sufficient justification for government intervention.
As a matter of fact and this crisis shows, financial transactions originated by toxic assets or any other speculative trade are polluting by their same origin.
Along the same lines one should think of windfall taxes (for instance on banking profits or bonuses) and tax on portfolio inflow transactions (a measure of capital control, aimed also at impacting currency appreciation, like the one introduced recently by Brazil).
All three kinds of taxes are Pigouvian in nature and scope. The rationale behind such taxes is that many types of financial transactions and economic agents, particularly those involving complex financial instruments and innovation, generates negative externalities either in terms of systemic risk, over size (for instance to big to fail) of institutions or excess of liquidity (hot money chasing nonexistent investment opportunities which result in assets bubbles), undesirable complex and high-risk financial transactions or simple and disorderly, but unwanted by a national government, appreciation of a currency.
In similar circumstances, taxes have been found to be more effective, and rewarding for governments, than regulation by requiring economic agents to internalize the external and social costs while making their capital movements and investments. This tends to align private incentive, including short term speculation, with social costs and benefits, with little distortions and great efficiency also taking into account costs imposed on others, particularly taxpayers, that are not taken into account by those taking the action and making the financial transaction.
UPDATE: Hopefully IMF is going to study this type of taxes.
I think the bill being drafted in US by Democratic Reps. Peter DeFazio (Ore.) and Ed Perlmutter (Colo.) on the sale and purchase of financial instruments such as stocks, options, derivatives and futures, should get economists and politician attention. It makes a lot of sense.
Friday, November 20, 2009
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I was reading Allen Meltzer's excellent history of the Fed the other day, and I was struck by how much Carter Glass and other 1920s/30s policymakers obsessed over speculators, to the point of imposing extremely dangerous monetary regulations (the so-called "real bills" doctrine) that severely deepened the Great Depression.
Speculators are annoying; we all know that. And making them less annoying is a worthy goal in itself; I'm not going to defend George Soros and attack on the British pound in the 90s.
But we need to be careful we don't scapegoat speculators to avoid painful choices, or stop searching for root causes. On the financial transaction tax, you can accomplish much the same thing by raising capital and margin requirements for financial companies, and reserve requirements for banks (which will deter speculation while driving funds towards Treasury debt; it's financial repression, of course, but so is a transaction tax and this version is actually implementable).
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