A gold-metal group of current and former financial executives has signed an open letter to the G20 conference asking that the countries impose a small tax on all financial transactions.
It isn’t that they have suddenly decided that they like taxes, but they see a greater enemy in volatility caused by high frequency trading. A tax of a couple of basis points won’t be material to any transaction that you or I might make, But for a computer making tens of thousands of transactions per second that can be a big deal, particularly if most of those transactions were only being done to extract a couple of basis points of profit in the first place. It is that hyperactive trading that can cause ‘flash crashes’ before the actual people in the market can understand what is happening. The signers of the letter believe that throwing some cold water on hyperactive trading would be a good idea. They point out that huge trading volumes are no longer the sign of health and liquidity that they once were but a financial market where computer models mean more than financial reality. They point out that the volume of trades on the world market is actually seventy times the size of the actual global economy.
The choice of the G20 as an audience for their proposal is particularly appropriate. One of the biggest arguments against financial transaction taxes is that the computer traders will simply switch to countries that do not have the taxes. However if the countries of the G20 were to all coordinate their rates and make the implementation contingent on the others adopting similar law then it would be possible for them to all ‘step across the line together’. Pretty much all of the world’s transactions either begin or end in a G20 country.
Currently there is a proposal in the European Union to have all 27 countries impose a uniform transaction tax of ten basis points (0.1%) on all stocks and bonds and one basis point (0.01%) on derivatives trades. That is expected to bring in 57.1 Billion Euros per year.
The authors of the letter point to the track record of those countries who have imposed financial transaction taxes on limited categories of assets without harm to their economies. They also note that many notable economists argue that financial transaction taxes might actually improve the functioning of the markets by having more of the trading volume be driven by fundamental long term value rather than sub-second arbitrage.
Notably the bankers drafting the letter make no mention of how the taxes should be used, and in fact it most likely would be best if the individual countries decided on whether they were used to provided services, reduce debt, or offset reductions in other taxes.