In order to frame the argument, consider the following statistics.
1.) Traditionally, 30% of oil futures trading was made up of speculators, or people who never had any intention of taking possession of the oil involved in the contracts they were trading. Oil producers and others involved in the oil industry made up the other 70%. Today, as gas pump prices once again go above $4 per gallon, that 30/70 ratio has been reversed.
2.) By some measures, 70% of all stock market transactions are now made by high frequency traders.
Common sense would seem to dictate that “investing” and “gambling” are actually two different endeavors. Traditionally, investing meant providing capital to a purpose that would, OVER TIME, produce a profit, or a return on the investment. Usually, the additional value was created by producing some type of good or service. In other words, wealth was created by creating something new that did not exist before, and that provided a benefit to someone.
Oil speculators, and high frequency traders “create” wealth in quite a different manner. By trading on both the ups and downs of the “investor” driven markets, they create wealth from nothing at all. They do not produce a good or service. And the “value” that is created provides no benefit other than to increase the wealth of the person doing the trading.
Now, one must recognize that the creation of “new” capital can, in itself, be considered beneficial to society as a whole. However, unless that new capital is invested in the tradition manner that creates new goods and services, then again, it only benefits the wealthy that can afford to invest or gamble is such a manner. To be blunt, it represents yet another method by which the proverbial rich get richer.
Please note that I strongly believe in the free market system. I do NOT advocate abolishing the existing system and I do NOT begrudge the wealthy capitalists from exercising their right to engage in speculative “investing”. Their actions are legal, as they should be in a free market system.
However, the two statistics above strongly indicate that perhaps the “system” has become out of balance. The shift from traditional wealth creation to speculative wealth creation has been a major contributor to the last two oil bubbles, and in fact the Great Recession in general. In addition, rather than benefiting society as a whole, it has also contributed to the ever increasing concentration of wealth in the US (see other posts in this blog).
There is a simple, elegant, and fair solution to this problem. It’s called a transaction tax, which involves placing a small levy on each transaction made. The effect of such a tax is to place a natural governor on high frequency trading and speculation. The more you trade, the more transaction taxes you pay. You can still trade as much as you wish, but the more you do, the more you pay back to the society which supports the systems that allow you to conduct such trades. Society as a whole is better off no matter the effect on speculative trading. If folks trade less, the markets will better reflect actual wealth creating economic activity. If speculative trading volume increases, society reaps the windfall benefits produced by the transaction based tax.
Opponents will immediately counter that such a tax will hinder the markets, deter trading, and thus dampen economic activity overall. I disagree. If a transaction tax reduces the disastrous effects of too much speculation in the markets, I say great. That will benefit the economy as a whole. And if the super rich want to continue their speculative activities, they are free to do so, but must be willing to pay a fair price for the privilege. Why wouldn’t a wealthy investor want to pay back, and pay into, a society and a system that is directly responsible for their ability to acquire such wealth?
But what about the small investor? Do we really want to create ANY additional barriers for the common man to invest? Certainly not. So based on the premise that the wealthy got that way because of a system that we all support and contribute to, I believe a transaction tax could be fairly implemented in a relatively simple manner. Below I present a proposal to get started along with some of the reasoning for the rates and ranges proposed.
Transaction Tax (on all SEC Registered securities AND unregistered securities transactions in the hedge fund, futures, OTC, and other various markets both regulated and unregulated.)
$0 – $10,000 = No Tax
These folks are not wealthy enough to pay to support the system.
$10,000 – $100,000 = 0.1%
Ten to one hundred dollars are a tiny amounts in this range. They would hardly be noticed and are virtually insignificant compared to management fees and investment returns.
$100,000 – $1 million = 0.5%
The same arguments above apply to this range (where the tax would range from $500 to $5000). Acknowledged, at five grand we are starting to talk about real money. So we will include the “Frequency” exclusion described below.
$1 – 10 million = 1%
Let’s face it, if you are moving one to ten million dollars around on a frequent basis, then 1.) you are very wealthy and can afford 1% as many times as you want to, and 2.) you are moving amounts that are significant to the point that they could in themselves affect the market. (High Frequency Traders operate on such tiny fractions that any $1 million dollar bet on a single position could affect that position.) Thus, you should pay this highest amount to help protect the system you are gaming.
$10 million on up = 0.1%
Now economies of scale kick in. A tenth of one percent on $10 Million dollars is $10,000 which is a significant transaction fee no matter how you look at it. It’s also a significant tax payment, especially if paid frequently. But it is also small enough (ten cents per $100 dollars) that it still represents a fairly insignificant, and fair, overall effect on your transaction.
The “Frequency” exclusion would provide that that the tax does not apply to the first four transactions made by any individual or entity in a single year. So a traditional investor (think “buy and hold”) would never pay the tax at all. Re-positioning assets from time to time is a critical requirement for any well managed diversified portfolio. But 99% of the population can not “re-position” amounts of $100,000 very often. For those that need to do so more than four times in a year, a 0.1% fee is reasonable and fairly insignificant. And, because 0.1% is reasonable and fairly insignificant, the Frequency exclusion for the first four annual transactions would not apply to the $10 million-and-up traders.
Once last example to make a point. The $10,000 investor who watches the market and moves his money quite a bit would pay $10 the fifth time he traded in one year. I guarantee you that his broker dealer or investment adviser has already charged him far more!
So think about the intuitive and innate fairness of a transaction based tax. And think about the positive benefits to the financial system and society as a whole, not to mention a more logical approach to raising revenue for the government. After all, it is our government (of and by the people) that backs the almighty greenback (dollar) and the entire financial and banking systems. Shouldn’t those that own and control the largest amounts pay the most to protect this system, and their own assets?
A transaction tax has been proposed but has yet to make much noise in the news. As it does, consider providing strong support for such a measure.