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Financial Transaction Tax

Financial Transactions Taxes and Logic 101 for Fred Hiatt

I've been speaking and writing on financial transactions taxes for close to a quarter century. Most people don't find the concept that difficult to understand, but apparently Fred Hiatt does. In a column bemoaning the sidetracking of Obamanomics, Hiatt tells readers that Obama:

"has a targeted version of the left’s beloved financial transactions tax, too: a levy on the largest banks proportional to the riskiness of their liabilities."

Actually, the bank tax has nothing to do with a financial transactions tax. The bank tax is intended to compensate for the implicit subsidy given to large banks that markets view as too big to fail. Since investors assume that the government will bail the banks out if they get into trouble they are willing to lend to them at a substantially lower interest rate than would otherwise be the case. The tax is intended to offset this subsidy although the size of the tax proposed by Obama is an order of magnitude smaller than size of the implicit subsidy, which the I.M.F. recently estimated at $50 billion a year.

In contrast, a financial transactions tax is intended to reduce the excessive amount of trading in financial markets. While this trading uses economic resources, it contributes nothing to the productive economy. A recent analysis from the Bank of International Settlements found that countries with very large financial sectors, like the United States, experience slower growth. A financial transactions tax would go far toward reducing the amount of excessive trading in the financial sector.

Dean Baker / June 15, 2015