Rebuttal to Krugman/s "Things to Tax"

In a recent op-ed entitled "Things to Tax", Paul Krugman suggests a financial transaction tax.

And then there’s the idea of taxing financial transactions, which have exploded in recent decades. The economic value of all this trading is dubious at best. In fact, there’s considerable evidence suggesting that too much trading is going on. Still, nobody is proposing a punitive tax. On the table, instead, are proposals like the one recently made by Senator Tom Harkin and Representative Peter DeFazio for a tiny fee on financial transactions.

And here’s the thing: Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.

This is so wrong-headed on so many levels.

The majority of trades are executed for tiny profits. And I'm not just talking about the machines, I'm talking about real human beings. Even a .1% transaction tax would kill this entire business in the U.S. It simply would no longer be a profitable business. Most likely it would move offshore, to non-taxed markets. If there's one thing we've learned from globalization, it's that capital will quickly move to the most profitable location.

Secondly, by removing the high-frequency traders (and believe me, I'm no fan of HFT; the deck has always been stacked against the little guy, now it's practically impossible to beat the computers) liquidity would dry up. Formerly liquid issues would start trading with wide spreads. Costs would go up for the remaining market participants, who don't have the know-how or resources to trade overseas: retail investors. AKA, the suckers who always end up holding the bag.

Professor Krugman has made the classic error when assessing potential revenue from a new tax: he assumes that the new tax would not change peoples' behavior. If this logic worked, why not impose a $1 tax on each U.S. text message? Golly, my daughter sends hundreds of text messages every month, this tax could retire our national debt in a matter of months!

So, a financial transactions tax, which Krugman expects to raise billiions and hurt "the bad guys", would actually raise very little revenue and hurt only "the little guys." Tweet