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PETER CRABB: Taxing stock market trading won’t just hurt the rich

Robin and his merry men are back to take from the rich. But will the money get to the poor?

The English folklore hero is returning this time in the form of a new tax. Proponents of the “Robin Hood” tax call for a small tax on the trade of stocks, bonds or any other financial instruments.

Financial transactions taxes were first proposed by Nobel-prize-winning economist James Tobin. Following the collapse of the Bretton Woods Exchange Rate agreement in 1971, Tobin introduced a tax on currency trading with the idea it might reduce volatile exchange rates.

Tobin suggested the tax would dissuade short-term speculation, much like that which was experienced in global financial markets before and during the 2007-09 financial crisis. Tobin actually drew from work by John Maynard Keynes, who suggested that speculation raised volatility in financial markets and hurt the overall economy.

The Tobin tax on currency trading never went very far because even Tobin himself thought it was practically infeasible, but the idea is gaining traction.

In today’s environment, a financial transactions tax has popular appeal in the thought that it will be paid by banks and financial institutions that many blame for the weak economy.

U.S. Rep. Peter DeFazio of Oregon is co-sponsoring a bill that would impose a $3 tax on every $10,000 financial transaction, or 0.03 percent. By some estimates, this small marginal tax could raise $350 billion in tax revenue over the next 10 years.

As reported in the Idaho Statesman, DeFazio believes the tax would “raise money to invest in the real economy.” Essentially, he is saying that $350 billion in new spending by the government will make up for, or overcome, any investment in the real economy that is not occurring already.

There is strong agreement among economists, however, that this is a very bad way to take from the rich and give to the poor.

The strongest case against a financial transactions tax is the 1980s’ Swedish experiment. In 1984, Sweden imposed a 0.5 percent tax on all stock sales and, later, a much smaller tax on bonds. The government of Sweden never received anywhere near the expected tax revenue, and both trading volume and prices on the Swedish stock exchange dropped dramatically.

Beyond the lack of empirical evidence for a Tobin tax, the arguments for taxing stock and bond trades are weak.

First, there is no exact relationship between volatility in financial markets and a weak economy. The stock and bond markets can be very volatile even when the economy is growing.

Second, speculation is good for the economy; without it, growth slows. The financial markets need speculators for the process of price discovery and liquidity. The real economy needs liquid financial markets to get the capital needed for economic growth.

Third, a financial transactions tax takes from everyone, not just the rich. Pension funds, for example, account for a large amount of trading in financial markets. Beneficiaries in Idaho’s Public Employee Retirement System, which holds nearly $10 billion financial assets, will be affected.

Robin Hood wouldn’t approve. Financial transactions taxes take from everyone, and it is anyone’s guess how the government will get the money to the poor.

PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa

prcrabb@nnu.edu

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