Late last year, the Congressional Budget Office (CBO) responded to an inquiry from Senator Orrin Hatch about the potential impact of a financial transaction tax (FTT) of three one-hundredths of a percent on (1) GDP and jobs, (2) municipal financing, and (3) U.S. Treasuries. 

In general, CBO responded that the FTT “could” or “would probably” cause “slight” negative effects in the short term, and it never quantifies these effects.  As for long-term impact, CBO states that it does not know whether it will be positive or negative.  While some media and critics have held up this letter as a major setback for the FTT, let’s take a closer look at what CBO actually said:

Question #1:  What impact would the proposed tax have on gross domestic product (GDP) and on U.S. jobs?

CBO’s response:

In the short term, imposing the transaction tax would probably reduce output and employment.  Beyond the first few years, however, the tax’s net impact on the economy is unclear… Employment would be unaffected in the long term.

This appears to be far from damning.  CBO dilutes its assessment of the short-term impact with the qualifier, “probably,” and says that the long-term impact on GDP is “unclear” and that jobs will not be affected.  In explaining its reasoning, CBO looks at effects on investment and decides to counter an argument in favor of the FTT: 

Some analysts believe that… the tax would reduce volatility… [and] might discourage short-term speculation, which can destabilize markets… However, the tax would discourage all short-term trading, not just speculation—including transactions by well-informed traders and transactions that stabilize markets. 

In fact, the extent to which “well-informed” traders can stabilize prices is trivial. The transactions that CBO refers to happen when there are slight price discrepancies between different exchanges, and traders make profits by capitalizing on these gaps.  If, for example, the FTT were to make this trading profitable only when the gap between prices of a certain stock rose to 11 cents instead of 10 cents, then the FTT would allow prices to be slightly further out of balance for a little longer, which has essentially zero consequence.

Mark WeisbrotThe Sacramento Bee (CA), January 19, 2012

January 19, 2012 (Prices Byte)

January 19, 2012