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Murphy’s Wall Street Tax Plan Has Pros and Cons

Murphy’s Wall Street Tax Plan Has Pros and Cons

The Covid-19 pandemic and resulting recession have wreaked havoc on U.S. state budgets. Lawmakers are looking for news ways to generate revenue to help close the spending shortfall. Governor Phil Murphy of New Jersey, a Democrat and retired Goldman Sachs Group Inc. senior director, has said he is “very seriously” considering a tax on high-volume electronic trading in the state, home to Wall Street’s huge server farms. Bloomberg News reports New Jersey would charge a quarter of a cent per “financial transaction” at entities processing at least 10,000 annually through electronic infrastructure in the state, according to the bill. It lists securities including stocks and derivatives such as options, futures and swaps.

The idea of a tax on financial transactions is not new, and lawmakers have generally rejected it out of concern for the potential negative fallout on the markets. The issue is complex, and Bloomberg  Opinion columnists have some thoughts:

Here’s One Tax Every Candidate Ought to Back: “In this spirit, three Democratic presidential candidates have proposed a financial transaction tax (FTT) to help fund their proposed investments in health care, education, and infrastructure. If properly designed, an FTT would raise substantial revenue, in a progressive fashion, without impeding price discovery or the efficient allocation of capital. An FTT is a small tax that would apply to trading in stocks, bonds, and derivatives. For example, an FTT of 10 basis points (0.10%) would result in a $10 tax for every $10,000 in stock sold. This idea is not new. The United Kingdom has had an FTT in the form of a stamp duty since 1694, and several other countries have a version of an FTT now. There are notable successes. Hong Kong raises significant revenue, equivalent to more than 1% of gross domestic product, through its FTT while serving as a critical global financial center.” — Antonio Weiss

Financial Transactions Make for the Perfect Tax: “The financial services industry generally does not like the idea of taxing financial market transactions, like that proposed this week by Democrat Senator Brian Schatz of Hawaii in the aptly namedWall Street Tax Act of 2019. Perhaps the concern is that it would reduce ‘market liquidity’ and harm the economy. These concerns are misplaced.
In a bull market there is plenty of liquidity. It is easy to buy and sell a lot of stocks and bonds when folks are optimistic and prices are rising. In a crisis, however, it becomes very difficult to trade. The observed changes in ‘liquidity conditions’ in these two types of market environments have nothing to do with transactions costs and everything to do with the fear of losing money when prices are falling.” — Douglas Cliggott

The Case for a Financial Transaction Tax: “It’s a good conservative principle that where possible, the government should recover the cost of its services from the people who use them, rather than from taxpayers at large. It’s also pretty uncontroversial that the government must oversee financial markets, to ensure that they are free and fair. It thus makes sense that the government should charge a user fee for financial transactions. So why has the idea — as proposed by various politicians, including presidential candidate Bernie Sanders, Senator Brian Schatz and Representative Peter DeFazio — encountered so much opposition? It’s not as if this were radical socialism. Hong Kong, perennially rated the world’s freest economy by the conservative Heritage Foundation, has had a 0.1% tax on financial transactions for years. The levy has had no discernible negative effect on its economy, though it might be responsible for a relative lack of high-frequency trading. Many other countries have financial transaction taxes, including the U.K., Switzerland and Taiwan.” — Michael Edesess

Why Taxing Bad Things Isn’t Always Good Policy: “Then there are those who want to use taxes to discourage excessive trading in financial markets, while extracting revenue from Wall Street. Economic theory suggests that much of the frantic trading that characterizes modern financial markets could be a waste of resources — traders trying to beat each other to the punch by milliseconds, but not ultimately helping companies to invest more efficiently or helping investors to allocate risk. Leaders such as senator and presidential candidate Bernie Sanders have proposed a tax on financial transactions in order to curb such excessive trading. Sanders has also promised to use the revenue from the tax to pay for free college and student debt cancellation.” — Noah Smith

Why Bernie’s Proposed Wall Street Tax Won’t Work:  “On Friday, Feb. 28, the S&P 500 ETF SPY traded over $100 billion in volume in a single day. With a .1% financial transactions tax, something that a few U.S. presidential hopefuls had proposed, that volume would have generated $100 million in government revenue. Those types of numbers have lawmakers salivating over the potential to raise untold amounts of money from applying very small fees to stock, bond and derivatives trades — so small that people wouldn’t even notice. But financial transactions taxes have also become a rallying cry among U.S. Democrats, like Senator Bernie Sanders, seeking to rein in Wall Street. The idea is that those taxes would discourage pointless speculation and high-frequency trading, returning our markets to the halcyon days when transaction costs were high and people traded less. Lots of people dislike fees of all kinds — brokerage commissions, mutual fund loads and so forth — and many are also ambivalent about the potential for significant taxes on trades, which eat into investors’ returns over time. In fact, this has been the argument against financial transactions taxes for decades: It’s not ‘Wall Street’ that pays, but individual investors.” — Jared Dillian

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.

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