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A public policy blog from AEI
Europe seems dead set on taxing financial trading next year. And that makes me think of robots. There’s been lots of concern lately about automation — both robots and algorithms — redistributing wealth away from labor and towards capital. As finance professor Noah Smith recently wrote in The Atlantic:
If the “endowment of human capital” with which people are born gets less and less valuable, we’ll get closer and closer to that Econ 101 example of a world in which the capital owners get everything. A society with cheap robot labor would be an incredibly prosperous one, but we will need to find some way for the vast majority of human beings to share in that prosperity, or we risk the kinds of dystopian outcomes that now exist only in science fiction.
Well, we don’t need to take things that far to think greater asset building a good idea, perhaps through some sort of universal 401k program. Another smart idea is phasing out investment taxes for long-term investors. But people aren’t going to want to participate more in the stock market if they think it a) too volatile for regular people or b) a rigged game. High-frequency trading doesn’t help make the Ownership Society sale. As my friend Martin Hutchinson of the Asia Times puts it:
High-frequency trading is objectionable for two reasons. First, its proponents claim it provides liquidity to the market, but that’s not really the case. In periods of turbulence, the liquidity that HFT supplies is quickly withdrawn, as the institutions operating the trading systems shut them off for fear of large and destabilizing losses. Indeed, liquidity that switches off when it is most needed is of no use at all. To the contrary, it destabilizes the market rather than stabilizing it.
The second reason high-frequency trading is bad is that it uses machines to get trade information before competitors. Of course, trading based on extra-fast knowledge of the trading flow should qualify as inside information, and thus be illegal.
Unfortunately, it can’t be made illegal, because market-makers do it all the time. And what’s more is that stock exchanges make huge sums of money by renting space within feet of the exchanges’ computers to high-frequency traders.
Hutchinson recommends a 0.01%-0.02% Pigovian tax on trading stocks and bonds and a 0.05% tax on derivatives to tamp down on such speculation. It’s an interesting idea. Not only might it give investors greater confidence in the stock market, the revenue could be used to lower the overall corporate tax rate. In Congress, Democrats Sen. Tom Harkin and Rep. Peter DeFazio are reintroducing their transaction tax bill, which would raise nearly $400 billion over a decade — though not lower corporate tax rates. Banking analyst Jaret Seiberg of Guggeneheim Washington Research Group gives it poor odds:
— Financial firms have done an excellent job framing this as a tax on retirement savings, as mutual funds and pension funds would pay the tax. That has previously doomed the tax from ever getting serious attention.
— For House Republicans, this is nothing more than another tax. We see no appetite among House Republicans for any tax hike, especially one framed as hurting those saving for retirement.
— In addition, the Obama administration has never favored the tax.
— And if supporters could not get this done during the height of the financial crisis, then it is hard to see how they could pass it now that the crisis is a few years behind us. While we believe legislation will not advance, headline risk is high. The government is desperate for cash and this raises a ton of money. So there will be many opportunities for Harkin and DeFazio to generate attention. And we suspect they will seize those chances.There are also more radical versions of the transaction tax that raise far more money. We suspect to see those reintroduced this year as well.
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