Proposed tax on financial transactions

[Moliere]

I read an article on this proposed tax. I can't link the article I read but I did find many similar articles such as this one: http://www.huffingtonpost.com/2011/1...n_1024692.html

The reason for imposing the tax is a good one as its aimed more to eliminate market speculation. However the way they are going about it seems wrong. This tax would be imposed on everyone in the market, not just speculators. Why should those who are not day traders or speculators have to pay for the sins of others? Stock investments and derivatives are used everyday by many in non-speculative ways. It's a form of risk reduction and I'm afraid what might happen with this tax is it will make operations more risky for those that were not even part of the 2008 meltdown.

It's also interesting that the OWS people seem to be grasping for any sort of proposal that might unify themselves. They are obviously still a disjointed group of differing interests.

[All-American]

Hmm. A tax with the explicit purpose of increasing transaction costs . . . . Sounds like just the thing to get the economy rolling again.

[ERCougar]

Hmm. A tax with the explicit purpose of increasing transaction costs . . . . Sounds like just the thing to get the economy rolling again.

It's nice to throw out Econ 101 terms generally, but these transaction costs have little (or nothing) to do with economic inefficiency.

[All-American]

It's nice to throw out Econ 101 terms generally, but these transaction costs have little (or nothing) to do with economic inefficiency.

I dunno, I kind of get the impression that a lot of these OWS people could stand for a little exposure to Econ 101.

[ERCougar]

I dunno, I kind of get the impression that a lot of these OWS people could stand for a little exposure to Econ 101.

Absolutely no argument there.
But this is an idea of a tax that mitigates external costs that I can get behind (speaking of throwing out Econ 101 terms... )

[Moliere]

It's nice to throw out Econ 101 terms generally, but these transaction costs have little (or nothing) to do with economic inefficiency.

I agree to a point. It's not necessary to have day traders and speculation to have market efficiency, but this tax will still impose a cost on typical market transactions that will affect the middle class. Many companies reduce risk through interest rate derivatives, forward purchases, gas options, etc. and this just makes it cost more to reduce risk.

[ERCougar]

I agree to a point. It's not necessary to have day traders and speculation to have market efficiency, but this tax will still impose a cost on typical market transactions that will affect the middle class. Many companies reduce risk through interest rate derivatives, forward purchases, gas options, etc. and this just makes it cost more to reduce risk.

No, I agree with you--good idea, execution needs some improvement.

[Viking]

The best cure for speculation is to go bust, not to tax it.

[All-American]

See, this kind of a thing rings several alarms for me. Any time you have a targeted tax-- in effect, a tax which "somebody else" has to pay-- I think it deserves some skepticism. If the goal is to raise revenue, then I much prefer taxes with low rates and broad bases. Even if the undemocratic nature of a majority imposing an unshared obligation upon a minority doesn't concern you, the fact that a narrowly-drawn tax is more exposed to shock should. Should a tax on financial transactions become a viable source of revenue, then we will have government programs dependent upon an inherently volatile money streams. That may not be good policy.

Where a targeted tax is meant more to regulate a behavior than to increase revenue (which is just an extra benefit of the tax), then it is more justifiable, but my gut feel is that the problem with the economic system is not that there is too much trading going on. If anything, we're concerned at the present lack of money flow. At first glance, this tax looks more like an simple effort to get more money from "THEM".

[cowboy]

...The reason for imposing the tax is a good one as its aimed more to eliminate market speculation.

Why? Speculators get a bum rap, especially in the futures markets. Futures markets don't need less speculation, they need better convergence.

It's not necessary to have day traders and speculation to have market efficiency...

I disagree. Try trading some of the ag commodities without specs.

[Moliere]

Why? Speculators get a bum rap, especially in the futures markets. Futures markets don't need less speculation, they need better convergence.



I disagree. Try trading some of the ag commodities without specs.

I guess I view market efficiency as the ability to sell stock or bonds or enter into a hedge. We have that already. Speculators only increase volume, which often times leads to price manipulation. Take out the speculators and volume drops, but so does volatility. You could counterbalance the loss in volatility by forcing all derivatives to be traded on exchanges. I'm of entirely warm on that idea since I see the need for individualized contracts to meet certain needs, but it would be better than having high volatility

Ill admit I know little about selling pork bellies. I take it you are saying its a low volume market.

[Katy Lied]

I was just going to use Cowboy as an example. If there are no speculators buying Cowboy's cattle futures, then he's going to have to wait until his steers go to market before he collects any revenue. That's a whole year of costs before he collects anything.

Speculators are necessary to a robust market. Anyone who says otherwise doesn't know what the term means.

Also, lots of stock brokers (as opposed to asset gatherers) make 4-5% on a trade. 1/2% is a huge transaction cost. That would be like upping your federal tax 10%.

[Katy Lied]

Take out the speculators and volume drops, but so does volatility. You could counterbalance the loss in volatility by forcing all derivatives to be traded on exchanges.

Not sure what the exchange will do to mitigate loss in (you probably mean volume, not volatility). On Black Monday, the market makers with monopolies in certain markets just sat it out. They were given their monopolies in exchange for being forced to make a market in a thinly traded stock. Yet, when the volatility got too high, they just sat on the side and did nothing. The SEC did not discipline them at all.

[cowboy]

Ill admit I know little about selling pork bellies. I take it you are saying its a low volume market.

Pork bellies lost so much volume that they were de-listed, which is a huge concern for lightly traded ag commodities. Without specs to take the other side of my hedge, the market goes away. When markets go away, I not only lose a valuable risk management tool, but also a critical price discovery tool.

I was just going to use Cowboy as an example. If there are no speculators buying Cowboy's cattle futures, then he's going to have to wait until his steers go to market before he collects any revenue. That's a whole year of costs before he collects anything.

Speculators are necessary to a robust market. Anyone who says otherwise doesn't know what the term means.

Also, lots of stock brokers (as opposed to asset gatherers) make 4-5% on a trade. 1/2% is a huge transaction cost. That would be like upping your federal tax 10%.

What you said.

[Moliere]

Pork bellies lost so much volume that they were de-listed, which is a huge concern for lightly traded ag commodities. Without specs to take the other side of my hedge, the market goes away. When markets go away, I not only lose a valuable risk management tool, but also a critical price discovery tool.



What you said.

No, no, no....I understand there always has to be speculation with a counterparty. When we enter into derivatives it is always with a bank that has no physical offset like we have. That's not where I'm going with this. I'm talking about the trading shops that exist for the sole purpose of speculation. It's estimated that 70% of the volume in the market is pure speculation (not a bank taking the other side of a hedge).

I'm just saying that a tax on everyone is ridiculous. You would probably agree since I doubt you enter in futures without having a physical product to sell come slaughter time. You aren't a speculator and have a specific reason for your transactions.

The only thing I can think of that currently curtails this type of thing is the ordinary versus capital gain distinction and related differences in tax treatment, but even that is under the microscope with Warren Buffet's (a known hater of derivatives) recent rants.