Monday, January 11, 2010

Get Our Money Back!

While we're looking for good populist ways to go after the banks before the 2010 election, can we bring back the idea of a financial transactions tax? It's particularly suited to a political moment where the nation is hurting economically and banks are making big profits. The rhetoric is really simple -- the banks blew up the economy, we saved them, now they're making huge profits, and we're gonna get our money back. (We did make some money off TARP repayments from healthy firms, but from what I've heard we'll still have a big loss on AIG.) Swing voters aren't feeling much solidarity with the financial sector right now, and all the Republican moaning about tax increases will fall on deaf ears or worse since it's tax increases on Wall Street.

It's solid on policy grounds as well, discouraging speculation, having good distributive impact, and raising much-needed revenue. If there's some kind of worry about timing and it'd be best to do this after the economy recovers (I don't see that this is the case, given profits in the financial sector) we can delay it a little.

8 comments:

Dennis said...

This really needs to be pretty universal, alas -- people will just do swaps in some low-tax jurisdiction instead of trading in the US. It's not a bad idea, but you need to get most or all countries to sign on.

Neil Sinhababu said...

Is a low-tax jurisdiction going to bail you out when things go bad? Or can you count on America bailing you out?

Dennis said...

The point is subtler than that. Non-activists mostly want to own the economics associated with a stock rather than the control; as such, they can enter into a "total return swap," or TRS, on an asset rather than own the asset themselves. So a Caymans sub of Goldman, say, exchanges the total return of owning a stock at some price with a fund rather than the fund owning the shares directly. The bank may hedge but also may not -- certainly the effect seems likely to be the concentration of actual trading profits in overseas jurisdictions with no reduction in speculation. It'll just turn out that Goldman or someone owns substantially all the shares of everything and has swapped the return out the door.

It isn't about companies starting (or not) in the US; bailouts will affect foreign owners of the economics of US equities the same way they would have affected the owners of the shares. The point is that the effects of an insufficiently global transaction tax will be to (a) dramatically reduce the number of trades subject to tax while (b) not affecting the amount of speculation much at all. Read about what happened when Sweden tried it in the 90's.

janinsanfran said...

Only thing wrong with this excellent idea is that Geithner has apparently vetoed it and the administration is casting around for a substitute with similar optics. Per TPM.

Kind of sacrifices the politics of the tax when the bankers' guy gets a veto, don't you think?

Neil Sinhababu said...

Well, shit. Is there any way to tax Wall Street and make money?

Anonymous said...

A tax like this won't work. Among other things, Wall Street will simply pass it on to its customers via a wider-bid ask spread. This is particularly insidious when it happens on products used by the general public: a populist tax aimed at Wall Street ends up being paid for by Main Street.

A better approach to discouraging "speculation" (an amorphous term at best) would be to impose higher capital requirements on the banks and tie compensation schemes to longer-term performance.

Helen said...

So you have a good idea, some posters disagree with you, and you give up. Be strong.

Neil Sinhababu said...

Well, they have some good reasons. One of the really annoying things about Wall Street is its ability to change its mode of action to fall technically outside whatever regulations you draw up, while basically doing whatever it was doing before.