Vox Gets Story on Schatz’s Financial Transactions Tax Badly Wrong

February 28, 2019

I had a longer piece on this Vox article, but our site ate it, so I will be very brief. This Vox piece on the financial transactions tax introduced by Hawaii Senator Brian Schatz gets the story badly wrong.

The CBO revenue estimate does assume a substantial reduction in trading volume. It does not assume that trading volume remains unchanged, as the piece seems to imply.

Of course, the reduction in volume could be larger than CBO assumes, but this would not be a bad thing. In principle, we want the financial markets to operate using as few resources as possible, this means that they are more efficient. If we can operate the markets with half as many trades (like we did in the 1990s) and the markets just as effectively allocate capital, then the markets are more efficient, just as the trucking sector would be more efficient if we could deliver the same amounts of goods with half as many trucks and truckers.

From the standpoint of the individual investor the tax will mean a higher cost per trade, but they will do fewer trades, leaving their trading costs pretty much the same even with the tax. For example, if the tax raises cost by 30 percent, then they (or their fund manager) will reduce trading volume by roughly 30 percent.

In this way, the financial sector eats pretty much the whole cost of the tax. This is why it is so popular among economists.


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