Financial Transaction Tax

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John Fullerton:

"Confusion about the impact of a FTT on economic growth, as reflected in the Bloomberg View piece, has been sowed by the same banks that destroyed the economy and millions of lives. It rests on two misunderstandings:

First, because the economic system has effectively become a (misguided) financial system, opinion leaders get lulled into confusing financial market efficiency with economic efficiency. Markets are simply tools designed to facilitate the efficient allocation of capital to productive purpose in the real economy. As Keynes, Tobin, and the two Summers have made explicit, excess allocation of human and financial capital to speculation harms long-term economic efficiency, thereby harming the quantity and, more importantly, the quality of economic growth.

Second, systems scientists understand that any system must balance efficiency with resiliency in order to be sustainable. Modern financial markets represent excessive efficiency, with the resulting diminution of resiliency that manifests in extreme volatility and flash crashes.

In the post “efficient market theory” world of 2011, with high frequency trading accounting for up to 70% of the market’s explosive trading volume, and short-term-momentum-driven and information-driven (legal and illegal) speculation overwhelming long-term investors in the marketplace, and highly leveraged derivative speculation overwhelming the use of derivatives for genuine risk management purposes, the policy case for a well-designed FTT is overwhelming. The fact that it can generate billions of dollars in badly needed tax revenues is a bonus, one that any genuine deficit hawk should favor.

The mechanical feasibility of collecting the tax in our digital world is now well-documented in a study by the Institute of Development Studies, and can be seen in practice in the UK, Singapore, Hong Kong, and Switzerland to name just a few." (


John Fullerton:

"You know you’ve hit a hot button when publicly traded stock exchanges, futures brokers, and a host of bank stocks get slammed with the simple mention of a financial transactions tax (“FTT”). The market’s response is understandable – even a small transactions tax would have a significant impact on the high frequency trading and other “quant” trading strategies that now comprise an astonishing 70% of vastly bloated equity trading volume.

The truth is simple: A modest financial transactions tax of less than 1% would serve as a remarkably efficient tool to achieve needed reform. To give it real teeth, it should be a dynamic tool of our systemic risk regulators, with the taxation rate automatically increasing during periods of heightened market volatility.

When managed with a public purpose in mind, securities markets are tools that efficiently facilitate investment in the productive real economy. But in a confusion of means and ends, much of the market has morphed into a frenzy of destabilizing, short-term speculation that at best pollutes the financial system with instability and lost confidence, and at worst creates episodes of outright theft.

In our technology driven, short-term, speculative financial system, the arguments in favor of a financial transactions tax are now stronger than ever. Nobel Laureate economist James Tobin called for a transactions tax in 1971 (the “Tobin Tax”) “to throw some sand in the gears of our excessively efficient money markets.” Tobin must have understood what systems scientists now know: excessive efficiency comes at a cost of system resiliency. Similarly, the famous speculator (and economist) John Maynard Keynes suggested a tax on currency transactions to address excessive speculation. In Keynes' time, speculation was a small distraction in the financial system hampering productive investment. Today it is a sideshow that has stolen the stage and needs to be put back in its place.

To be fair, not all quant trading is destabilizing. But, the constructive, technology- enabled market-making functions would easily adjust to any uniform tax. The financial markets are responding to short-term speculative financial interests rather than the long-term fundamental interest of real economic investment essential for creating productive jobs in the real economy.

A financial transactions tax will make certain asymmetric information based, proprietary trading strategies unprofitable since they rely on nearly non-existent transactions costs. The goal of fair markets is a level playing field of information. That’s why trading on “inside information” is illegal. Stock exchanges, which have lost sight of their public purpose in the well-intended pursuit of competitive advantage, will suffer for a while. Misguided principles have consequences.

Despite claims that trading will flee jurisdictions that impose a transactions tax, such taxes exist today in the UK, China, Hong Kong, Singapore, Switzerland, and other countries. If the leading financial centers of New York, London, France, Germany, and Tokyo together implemented a more comprehensive transaction tax regime, other countries would see it in their interest to follow suit. Technical feasibility in the digital age with centralized trading and settlement is not a problem, as Nobel Laureate Joseph Stiglitz and numerous studies have noted.

Conflicted bankers and exchange operators say through their economist friends that a transactions tax will hurt economic growth, presumably due to the lost market efficiency. This argument is fallacious. The value of any efficiency loss is far smaller to the real economy than the quite obviously needed resiliency gain, and is a necessary tradeoff. And the “growth” of revenues and bonuses of the quant traders and exchanges that will be affected will be more than offset by the redeployment of this talent and capital into more socially productive purposes. How about more “quant” geniuses working on carbon sequestration, cancer research, and global access to safe drinking water? How about teaching math again?

This is all to say nothing of the substantial, and desperately needed revenues a financial transaction tax could generate, which of course is why Sarkozy and Merkel brought it up now. More revenues without raising income taxes on people or businesses, improved market resiliency, and a reallocation of capital to productive long-term investment that can fuel sustainable growth, creates jobs, and in the process reduces government deficits, makes a financial transactions tax a Win-Win-Win. Academic studies have estimated the value of a financial transactions tax could exceed $100 billion per year in the US alone just from the tax revenue - the other two wins come as a bonus." (