The case for a trading tax.

There is a big understanding gap in economic theory.....

At least on one thing we agree.

What would actually happen is that the Lorenz curve would flatten and the middle class have more spending power. Don't count on the economy to tailspin the way you assume that it will. Listen to where the noise is coming from and there you will find some clues.
Think of tax reciepts like a price. If the goal of tax policy is to maximize revenue then there is an optimum tax rate. Any rate lower than the optimum rate wll cause a reduction in revenue just as any rate over the optimum rate will lower tax revenue.

You wouldn't get shrinking tax reciepts you would get shinking government an less need for tax reciepts.

Tax the rich at a very high rate and government will shrink in size. Then the tax burden on everyone will fall.
James

.....would have the effect of shrinking tax receipts and therefore...the economy along with the govt. itself.

Yes- the economy would go further into tailspin allright....but who in their right mind could possibly want that? This is positively the single most bizarre presciption for economic well being I've ever seen.

10/4 on the smaller government. U.F.O.

If a smaller government would benefit the super rich, then the size and cost of government would shrink. Government could not grow in size against the wishes of those with the money and power to make it small if that was to their advantage.

UFO's example and in fact all empirical evidence argues the exact opposite. Excessively taxing the rich both reduces incentive to become rich and thus impedes activity, effort and risk taking, and causes those who already are rich to simply leave...each of which have a decidedly negative impact on economic development. Economic history bears this out- again and again. Show me where raising taxes on the rich has ever increased economic activity- in real life.

Edited by IYB, 19 January 2009 - 12:20 AM.

"democracy corrupts free markets"
I say that people corrupt all markets as they have opportunity.

The socialist systems are rife with corruption by those in power and suffering by those not in power.
While socialists mainly share the belief that capitalism unfairly concentrates power and wealth among a small segment of society that controls capital, creates an unequal society and does not provide equal opportunities for everyone in society to attain such status, history shows that this exists under all governments eventually.
The only difference is who has the power, control and wealth.

Thus I conclude that smaller government is better and freedom and property rights produce the most good for society.
This was the experience and conclusion of the Pilgrims under William Bradford:

On August 1, 1620, the Mayflower set sail. It carried a total of 102 passengers, including forty Pilgrims led by William Bradford. On the journey, Bradford set up an agreement, a contract, that established just and equal laws for all members of the new community.

The original contract the Pilgrims had entered into with their merchant-sponsors in London called for everything they produced to go into a common store, when they got here, and each member of the community was entitled to one common share. All of the land they cleared and the houses they built belong to the community as well.

William Bradford, who had become the new governor of the colony, recognized that this form of collectivism was as costly and destructive to the Pilgrims as that first harsh winter, which had taken so many lives. He decided to take bold action. Bradford assigned a plot of land to each family to work and manage, thus turning loose the power of the marketplace.
The Pilgrims experiment had failed miserably because when there was the common store, some people didn't put in as much as others and some people that didn't produce anything were taking things out, and it caused resentment just as it does today. So Bradford had to change it.

What Bradford and his community found was that the most creative and industrious people had no incentive to work any harder than anyone else, unless they could utilize the power of personal motivation! But while most of the rest of the world has been experimenting with socialism for well over a hundred years – trying to refine it, perfect it, and re-invent it – the Pilgrims decided early on to scrap it permanently.

Bradford wrote 'The experience that we had in this common course and condition, tried sundry years...that by taking away property, and bringing community into a common wealth, would make them happy and flourishing – as if they were wiser than G0d. For this community (so far as it was) was found to breed much confusion and discontent, and retard much employment that would have been to their benefit and comfort. For young men that were most able and fit for labor and service did repine that they should spend their time and strength to work for other men's wives and children without [being paid] that was thought injustice.'

The Pilgrims found that people could not be expected to do their best work without incentive. So what did Bradford's community try next? They unharnessed the power of good old free enterprise by invoking the undergirding capitalistic principle of private property. Every family was assigned its own plot of land to work and permitted to market its own crops and products.
And what was the result?

Here's what Bradford wrote, the governor of the Massachusetts colony. 'This had very good success, for it made all hands industrious, so as much more corn was planted than otherwise would have been.'

In no time, the Pilgrims found they had more food than they could eat themselves. ... So they set up trading posts and exchanged goods with the Indians. The profits allowed them to pay off their debts to the merchants in London. And the success and prosperity of the Plymouth settlement attracted more Europeans and began what came to be known as the 'Great Puritan Migration'.

If a smaller government would benefit the super rich, then the size and cost of government would shrink. Government could not grow in size against the wishes of those with the money and power to make it small if that was to their advantage.

UFO's example and in fact all empirical evidence argues the exact opposite. Excessively taxing the rich both reduces incentive to become rich and thus impedes activity, effort and risk taking, and causes those who already are rich to simply leave...each of which have a decidedly negative impact on economic development. Economic history bears this out- again and again. Show me where raising taxes on the rich has ever increased economic activity- in real life.

There is no such empirical evidence. This is the first time in history when governments around the world have been grossly used as a means to make a profit rather than as a means to administer justice.
In the 80's one of the things Milton Friedman said in his "Free To Choose" documentary was that one of the dangers of big government was that industrialists would take over the government and use it to their advantage. That seems to have happened. Public opinion is managable and it is much easier to influence the way in which government spends money than it is to compete fairly in the market. The greater the size of government, the bigger the advantage there is for those who are wealthy enough to direct lawmakers to pass laws according to their wishes. The bigger government gets, the more advantage there is to using democracy to make a profit rather than participating fairly in the market. Taxes have to be high on those who use the government for a profit making instrument in order take away the incentive for the government to grow without bounds. Most people are not as rich as they think they are but still feel threatened every time the phraze tax the rich is uttered.
Democracy is not an effecient means of determining how, what and for whom goods and services are produced. It is currently serving that purpose and is rapidly surpassing price as the our ecoomies primary tool for allocating resources. The system we have now is in many ways as dangerous as the central planning schemes that have ruined peoples lives in commumist countries. We need to heavily tax those who are destroying our free market.

We need to heavily tax those who are destroying our free market.

I had something else in mind.

http://www.portfolio...n-Stock-Trading


I am an advocate of a trading tax even back when George Bush Sr. sent out a trial balloon for one which, of course, was quickly shot down. (If I recall correctly the trial balloon lasted one day and was never heard from again ) Most on this board are opposed to ANY tax on trading which I fully understand, however, the tax would fall only on the user. Not unlike a gasoline tax, toll tax, telephone tax, etc. The tax need not be .0025% on the total transaction. Actually a flat fee user tax of say $20 per transaction would be acceptable to many I believe. With trillions of debt it is well understood taxes will be raised for the many. IMO this is one of the least egregious ways to raise revenue.

Good trading to all.

Your view would be understandable if you were a liberal politician with next to no understanding about the ways markets function. I gather you're not a liberal politician. Yet you evidently have no understanding of the ways markets function, nor does the idiot you linked to that wrote this misinformed article. What generally amazes me is that it won't be the liberal politican alone who will do the markets in. Instead, they will be helped by the participants themselves, guys like you.

There is no question that volume will be reduced with a tax of this type. This is the point of all the proponents, and there is every reason to assume that they would be successful. This guy you linked to is against short term trading. And therefore, he believes it should be taxed. He believes short term trading is "gambling". Guys with funds like Jim Simmons of Renaissance Capital are evidently lucky (according to the author), despite his repeated success and outperformance of a long number of years.

So, tax the transaction, reduce volume, and ergo, reduce liquidity. Somehow the author, and perhaps you, do not understand that with a reduction of liquidity comes a widening of spreads between bid and ask, such that everyone pays a higher cost to make a transaction. It just won't be measureable like your $20 fee, or the more populat .25%. If you doubt this simply check it for yourself. Look at the spread on a stock trading 100,000 shares a day versus one trading 50,000,000. Take a look at the spreads on the mini gold contracts versus the regular, more heavily traded gold contracts. Volatility should likewise increase, due to few buyers and sellers at close intervals, since volume is lower, and taxes discourage short term trading. This can be checked too....take a look at the markets back in the 70s for instance, when transaction costs were much higher, in that case due to commissions, and volume lower, volatility higher.

What you and some of your ill-informed bretheren would like to do is "tinker" with the markets. And certainly, you'll get no objection from the majority of citizens in the US, who don't trade stocks at all. And certainly you will achieve your goal which is to discourage active traders. The question is what is the consequence? At whose expense will these "changes" be made? Back when the Community Reinvestment Act was passed, and Fannie Mae and Freddie Mac were "encouraged" to go along with a reduction in lending standards, were the social engineers considering the consequences?

Certainly there is going to be a large tax to pay for these ill-conceived bailouts, another brilliant idea by social engineers. Lets hope that someone bothers to give it more thought though than to destroy our markets by introducing a transaction tax.

IT

This is going to really frustrate you proponents, and you are going to label me an expendable moron. But I would fail to live in a re-education camp long enough to break down and call someone unproductive who was/is/could be good enough to trade on my behalf for superior returns, even if that someone was my own self.

Those with the least ability to pay should be discouraged from doing so as a matter of public policy.

Meanwhile, those most able to pay, will do so and thus pay the most tax. It's very progressive.

Exempt all food, rent above say $700/mo and clothing items under, say, $25, and the "poor" will only pay when the get that plasma TV from rent-a-center.

If you want to create a credit for these folks to totally inure them to the tax, that's fine too, or of you want to create a credit for small businesses buying capital goods, that's also great.

It's very doable, though still immoral of course.

The only moral tax is a voluntary tax. It's more viable today than every before, though with the crisis at hand it has about 2 chances of even getting air time.

M

I am a long time advocate of the Value Added Tax. That is the only consumption type tax I endorse. The sales tax is the most egregious of all taxes as it falls hardest on those with the least ability to pay.

The only statistic on program trading I could find on short notice is the one listed here: Appears to me that program trading was about 30% of all trades on the NYSE in 2007. Hardly productive. Raises no new capital; rather it lines pockets of large banks, brokers, and provides obscene bonuses to their management.

Regards impairing capital...................hmmmm I hardly think $20 will impair or opaque much of anything. Just my take.

this is one of the least egregious ways to raise revenue

So, less information available to market participants is a good thing? Less liquidity and larger bid/ask spreads are a good thing? Less ability to allocate capital efficiently is a good thing?

Any "trading tax" is one of the MOST egregious ways to raise revenue.

The reason is very simple. The ONLY way that standards of living increase is through increases in productivity. The ONLY way that productivity increases is through capital investment. Obviously, anything that discourages capital investment will be to the detriment of productivity and standards of living in general.

Very, very bad idea. You wanna tax something, try consumption.