Financial Transaction Tax Debate Heats Up

Financial Transaction Tax

As the debate regarding a financial transaction tax heats up, Public Citizen has released a white paper that calculates the cost of such a tax to average investors to be “microscopic.

Recent talk about a financial transaction tax has increased, but the seriousness of that talk is in question.  In his most recent budget President Obama included a transaction tax proposal to fund the Commodity Futures Trading Commission, at the urging of outgoing CFTC commissioner Bart Chilton.

 

Financial transaction tax: Recurring costs

The Public Citizen report notes that If an investor allocated the average 401K investment amount, $85,000, towards mutual funds they could experience $1,144 in hidden and disclosed costs – and that number could jump to $1,994 if a one percent front-end sales load was included.  By comparison, the fully disclosed proposed financial transaction tax would experience $24.48 to $49.48 in recurring costs.

“The costs to ordinary investors of a small FTT would barely amount to a rounding error, while existing fees are an albatross holding back existing returns,” Taylor Lincoln, research director for Public Citizen’s Congress Watch division and author of the report, said in a statement. “Those purporting to look out for ordinary investors could demonstrate their sincerity by steering people away from funds with outrageous fees instead of fighting an FTT.”

The issues raised in the Public Citizen report tend to be different from those who argue HFT is a necessary component of markets.

Losing HFT could reduce liquidity, increase costs, say proponents

The key concern with a transaction tax is that it would effectively eliminate the practice of directional high frequency trading (HFT).  A recent stream of dueling academic reports on HFT, some positive some negative, have attempted to influence the argument.

Arguments in defense of HFT say that the practice is positive for the markets and keeps the cost of trading low.  If HFT were eliminated, it would cause exchanges, which rely on HFT for a large percentage of their revenue, to increase costs.  Further, if HFT were to be eliminated it could reduce market efficiency and liquidity. In Tuesday’s ValueWalk we reported on the New York Federal Reserve saying that HFT had a positive impact on market efficiency.

Arguments against HFT say the practice is dangerous and without benefit to the markets, but typically don’t address the same issues raised by HFT proponents.

“Computerized trading poses an unreasonable danger to our economy”

Key concerns regarding HFT are that it can be used by traders using a millisecond advantage to manipulate markets at the expense of ordinary investors.

“High-volume, computerized trading poses an unreasonable danger to our economy. A tiny tax on financial transactions would help limit this volatile practice while raising needed revenue,” said Susan Harley, deputy director of Public Citizen’s Congress Watch division. “It’s far past time for Wall Street to pay its fair share. Taxing financial transactions is commonsense reform and we urge Congress to take swift action to implement such a tax.”

Those opposed to a transaction tax include the major exchanges where stocks and derivatives are traded, as well as those directly involved in the HFT industry.  Those supporting the tax notably include Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman, billionaires Warren Buffet and Bill Gates as well as U.S. Sen. Tom Harkin (D-IA) and U.S. Rep. Peter DeFazio (D-OR.).

“Costs already borne by ordinary investors, both by those invested in institutional funds and self-directed investors in the stock market tend to be on the order of 12 to 25 times greater than those that might be added by implementing a financial transaction tax of 0.03 percent,” the report concludes. “If potential sales load fees are included, the ratio would be much higher.”

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

5 Comments on "Financial Transaction Tax Debate Heats Up"

  1. Nick the trader | Mar 13, 2014, 8:55 am at 8:55 am |

    High frequency trading is not without its merits, but the increasing use of disruptive trading strategies is causing consternation amongst money managers and brokers. Getting the best available prices should not be dependent on having the fastest technology or access to additional market data. We need a marketplace based on the principles of open-access, fairness and transparency, where smaller players with fewer resources are not put at a disadvantage. Regulators need to step up now and ensure effective policing of disruptive behaviour in the marketplace to avoid participants losing faith in the financial markets.

  2. The IMF’s FTT Final Report For The G-20, June 2010, “Its real burden may fall largely on final consumers (the final investor) rather than, as often seems to be supposed, earnings in the financial sector. Because it is levied on every transaction, the cumulative, ‘cascading’ effects of an FTT—tax being charged on values that reflect the payment of tax at earlier stages—can be significant and non-transparent.”

    This is the same tax some European countries plan on:

    Consider the City of London Economic Research reporting on the household savings losses. Spain 16 percent household savings loss, Germany 14.1 percent household savings loss, Italy 12.3 percent household savings loss.

    “The DCB study showed that 1.7 billion euros, over 42% of the annual FTT cost in the Netherlands, would be borne by pensions.”

    UK Parliament Economic Sub-Committee of the House of Lords, “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax.”
    UK Parliament European Scrutiny Committee citing the EU Commission’s FTT Impact Assessment, before including negative relocation effects, “a 3.43% fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.”

  3. In recent times and following comprehensive studies by the IMF, that agency particularly warned against this folly. Political decision makers refer to it as “fool’s gold”. This is a toxic tax that would guarantee capital flight to competitive pastures. It has been thoroughly discredited at every academic level and definitively spurned by global finance ministers. As recommended by the IMF, there are far more efficient, fair and non-destructive ways of taxing banks. Not one cent of this net revenue negative tax would be paid by a bank. Its flow-through effects would damage ordinary savers and small investors. As occurred in Sweden, experimenting with this would amount to economic masochism.

  4. PS: You can also REGULATE high frequency trading to stop it, rather than putting a tax on ALL middle class investors.

  5. Putting ANY tax on retirement funds in IRA, Roth IRA, 401k, Roth 401k, and pension funds is just plain WRONG. Are we not trying to encourage people to put as much into those accounts as possible? Why take a cut of those accounts??? Those are not high frequency traders. Yet you want to take a cut of their accounts. WRONG!

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