August 06, 2016
That’s what folks who saw his letter to the editor in the Washington Post must be asking. The letter derided the idea of funding free college tuition with a modest tax on trades of stocks, bonds, and derivatives. Chilton tells readers:
“A tax on financial trading activity has been tried in other nations, where it failed miserably. Trading (and the jobs and economic activity associated with it) moves to nations without such a tax. Trading these days takes place on computers, not on physical trading floors. When market migration inevitably occurs, anticipated revenue to fund programs (free college or anything else) evaporates. That’s not conjecture. That’s what has transpired in Germany, Japan, Switzerland, Sweden and Italy. Why would we jeopardize what are the most coveted markets on the planet?”
That sounds pretty authoritative — guess a financial transactions tax (FTT) is a bad idea. Except, it doesn’t have any basis in reality. Many countries, including the United States, long raised substantial revenue from taxing financial transactions. Even now, the United States has a tax of 0.00218 percent on stock trades which raises $500 million a year to fund the Securities and Exchange Commission.
There are many other countries that still have FTTs in place and raise a substantial sum of money as a result. One notable financial backwater on this list is the United Kingdom, where the tax consistently raises a bit more than 0.2 percent of GDP (more than $40 billion a year in the U.S.). The markets in China, Hong Kong, and India also have FTTs, so it’s not clear where Mr. Chilton expects our trades will go. (A partial list of the money raised by FTTs in different countries can be found in Table 1.)
It’s true that a FTT will downsize our financial markets by eliminating excessive trading, but for fans of economics this is good news. We wouldn’t want five million truckers moving goods back and forth across the country if one million could do the job. The same story applies to financial markets. If we can effectively allocate capital with half as many trades as we have today, why wouldn’t we want to see the gain in efficiency?
Correction: The Securities and Exchange Commission fee was originally listed as 0.0042 percent.
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