Hopefully we get similar statements from other brokerage CEOs since they have so much to lose with a ftt.
1/4% Tax on all stock trades pushed in NY Times today
- Thread starter seasideheights
- Start date
Hopefully we get similar statements from other brokerage CEOs since they have so much to lose with a ftt.
Yes, one has to admire this man's intellectual honesty (ironically, no irony there). But playing an objective scientist, hijacked by the populists is probably the most effective technique after all - it is the fair prosecutor that defense lawyers fear most...
So what Mr. Baker has just admitted here?
1) FTT taxes have not been designed to raise revenue, but for behavior modification purposes: "An FTT will raise transactions costs and therefore reduce the volume of trading. This is one of the main purposes of the tax."
2) Some short-term transactions are non-speculative and beneficial for market stability (i.e. taxing them would increase volatility): "Some of transactions that will be discouraged by an FTT will be stabilizing. For example, arbitragers trade to take advantage of small differences in prices between different markets."
3) There is no empirical evidence that the FTT taxes work, i.e. fulfill their primary purpose of reducing "long term overshooting" or "excessive volatility": "higher transactions costs are associated with higher volatility .. no significant effect on volatility". He even resisted from quoting the only empirical paper that shows that higher transaction costs can decrease statistical volatility (probably because the paper does so "contrary to previous studies..")
4) The custom definion of volatility in the Tobin tax theory ("long term overshooting") is non-falsifiable: "difficult to test, since unambiguous examples of speculative price movements are relatively rare."
5) Short-term liquidity-providing traders are beneficial for the investing public: "Trading costs have fallen sharply over the last three decades due to improvements in computer technology."
6) Tax rates proposed by the DeFazio bill would set us back 3 decades: "Therefore, even with FTTs in place, transaction costs would only be rising to their level of two decades ago in most markets [..] would only raise levels of volatility back to their 1980s level [..] already had vibrant capital markets in the 80s" (2010..1980 is 30 or even 31, not 20, but never mind the details
7) The largest investors (i.e. pension funds and other closet indexers) would lose most, because the most liquid stocks would be most affected: "This means that the greatest reduction in trading volume will occur in assets that have the most liquid markets, leaving them still quite liquid. The impact of the tax on trading volumes in markets that are already not very liquid will be considerably smaller."
8) Transaction taxes can create permanent inefficiencies and delay the process of price adjustment to new information even by several days: "lower trading volume could in fact lead to less efficiency [..] whether prices adjust in a single day or over a couple of days. It is difficult to imagine that this sort of delay in price adjustment would have any major repercussions for investment and real economic activity."
9) Middle class investors are not allowed to make a fortune on the stock market (they should lie back and think of England
: "Their goal is to save for specific purposes such as retirement or their childrenâs education, not make a fortune by constantly flipping stock or other assets"10) There is a negative feedback loop linking FTT with its tax base, which will make it difficult to raise much revenue: "but they are likely to respond to the tax by cutting back substantially on the frequency of their trades."
11) Trading volumes would decline sharply: "the calculations of the revenue raised through a tax assume sharp reductions in trading volume [..] assuming that trading volume falls by 50 percent." Here's a novelty, because Baker (2000) clearly assumed only 1/3 volume reductions (and a tax rate for stocks of 0.5%). So where can we see the details of the new calculation? And why we cannot use the older one? Has anything changed in the models used?
Other of his arguments are a bit less intellectually honest though, but we have already discussed them ad nauseam, so let's not engage in too much Baker-bashing again - he did admit enough already. Some of the areas where he has been economical with the truth, already discussed by us earlier, are:
- "tax-sheltered accounts would be exempted from the tax as would trades by pension funds [..] unlikely that middle class investors will pay the tax." (how about wider bid/ask spreads - any exemptions there?)
- "large traders will pay the tax" (incl. market makers?)
- "the tax is constructed to cover the whole array of tradable assets" (incl. forex and bonds?)
- "the U.K. raises the equivalent (relative to its GDP) of more than $30 billion a year on a tax that is only applied to stock trades" (this may be true, but volume, not GDP differences have been used in the literature and the UK tax rate of 0.5% must not be assumed, so it is overestimated about 3 times),
- "While there will be some efforts to shift the location of trading to evade the tax, it is likely that the impact of such shifting on the revenue collected will be relatively limited" (only if you did it at the full G20 level - see Sweden)
- "There seems little doubt that if the United States pushed for such taxes at the G-20 or other international forums that it could count on considerable cooperation from other countries" (like the countries which abolished the tax: India, Australia, Sweden, Japan, Germany...)
- "effective enforcement of financial transactions taxes requires only the policing of a relatively small number of very large transactions." (trading volume is quite different: mostly composed of a large nubmer of relatively small transactions, due to the use of the anti-price-impact order-splitting algos by the funds).
There are plenty of valid criticisms Mr. Baker chose not to respond to, by which he probably meant: "I'll pass on that".
All in all, I'm impressed by Mr. Baker's honesty, but not as much as with that Austrian paper I once dissected for the Wiki page - that one was so self-accusatory that tax proponents' mercenary, Boyd Reimer had to put more than a dozen of "some" qualifiers just to distance himself from those views (see the "Tobin tax proponents view on volatility"):
"Unfortunately, all empirical studies on the relationship between transaction costs, trading volume and price volatility in general, and on the possible effects of an FTT on volatility in particular, deal with short-term statistical volatility only. Therefore, the results of these studies cannot help to answer the question whether or not an FTT will mitigate misalignments of asset prices over the medium and long run." (Schulmeister et al, 2008, p. 11)
Such a pity that these Austrian guys have been caught on the wrong side of the argument... because their blind followers / idea hijackers / free-riders such as the union-funded think-tanks, Halifax Initiative or the 'direct-debit charities' are nowhere near their levels of intellectual honesty...
From Forbes:
http://blogs.forbes.com/davos/2010/01/30/nyse-euronext-ceo-lets-restart-reform/
NYSE Euronext's chief executive, Duncan Niederauer, says he sees some progress in the battle of banks vs. regulators. He's calling on everyone to hit the restart button, by creating a new framework for finding practical reforms:
"Yesterday, in the meeting I was in, I said it doesn't seem that we're going to accomplish much if the banks dig their heels in and the regulators, you know, have a tendency to over regulate. So why don't we compromise? Let's reset the dialogue, let's remark some of the boundaries, because some of the proposals I'd be very much in favor of are regulating based on what you do. Not what you say you are, if you say you're a bank, or if you say you're an insurance company; if you're in a lot of businesses I think we should regulate by function and by activity. . . . I'm very much against unnecessary taxes."
Niederauer told us he wants the focus to be on increasing transparency in the derivative markets and cracking down on leverage, as opposed to sheer size. It would be great to see the dialogue reset at Davos, a new turning point after weeks of acrimonious debate. But some of the biggest players on Wall Street (and in Washington) are noticeably absent--ahem, Jamie Dimon and Lloyd Blankfein. Any progress could only be one small step on the long road to reform.
http://blogs.forbes.com/davos/2010/01/30/nyse-euronext-ceo-lets-restart-reform/
NYSE Euronext's chief executive, Duncan Niederauer, says he sees some progress in the battle of banks vs. regulators. He's calling on everyone to hit the restart button, by creating a new framework for finding practical reforms:
"Yesterday, in the meeting I was in, I said it doesn't seem that we're going to accomplish much if the banks dig their heels in and the regulators, you know, have a tendency to over regulate. So why don't we compromise? Let's reset the dialogue, let's remark some of the boundaries, because some of the proposals I'd be very much in favor of are regulating based on what you do. Not what you say you are, if you say you're a bank, or if you say you're an insurance company; if you're in a lot of businesses I think we should regulate by function and by activity. . . . I'm very much against unnecessary taxes."
Niederauer told us he wants the focus to be on increasing transparency in the derivative markets and cracking down on leverage, as opposed to sheer size. It would be great to see the dialogue reset at Davos, a new turning point after weeks of acrimonious debate. But some of the biggest players on Wall Street (and in Washington) are noticeably absent--ahem, Jamie Dimon and Lloyd Blankfein. Any progress could only be one small step on the long road to reform.
Video of Duncan Niederauer talking about the Transaction Tax from the Forbes blog:
http://video.forbes.com/fvn/rgm-davos-10/concerns-over-a-transaction-tax#
http://video.forbes.com/fvn/rgm-davos-10/concerns-over-a-transaction-tax#
Some buffoonery on this stage. A union socialist in charge of global equalisation, complete with union jargon, and her comrade Frank who appears hysterical.
The subtle inferences are all there towards the end, but to the anti-bad tax partisan there's a notable absence of the poison words. On this subject, they are less outspoken than a weeks back. Hard to estimate if their stage restraint on the bad tax is a change in tactics, or result from behind scenes bargaining.
http://www.gawkk.com/davos-annual-meeting-2010-2010-dodging-the-double-dip/discuss
54 estimated votes for the TT Bill? What does 54 votes predict in terms of its survival?
The subtle inferences are all there towards the end, but to the anti-bad tax partisan there's a notable absence of the poison words. On this subject, they are less outspoken than a weeks back. Hard to estimate if their stage restraint on the bad tax is a change in tactics, or result from behind scenes bargaining.
http://www.gawkk.com/davos-annual-meeting-2010-2010-dodging-the-double-dip/discuss
54 estimated votes for the TT Bill? What does 54 votes predict in terms of its survival?
It's scary that this guy actually has a PhD in economics. This profession is probably the single greatest contributor to human misery on the planet. Gramm was also one of those responsible for the repeal of Glass-Steagall. Great job that guy did. There should be a special place in hell for Gramm, Baker, Krugman, and the rest of the bunch.
If we add the members of the Congressional Progressive Caucus (the group that DeFazio started) then the number comes to 102. It's not a given that all of the members of this group will vote in favor (there is at least one member opposed), but quite a few of the 4191 sponsors show up in the member list.
So the stock transaction revenue is still double-counted (taxed at 0.5%), as if there were no exemptions for the intermediaries, which in the UK account for 70% of the stock market volume. That mistake alone sets them back by up to $54 bn annually.
How about the second largest source of revenue - bonds - missing completely from the Congress version of the FTT bill? That's another $26 bn. And Forex is definitely exempt from both versions, so those $7.8 bn are gone as well.
50% volume reductions for options and futures are not conservative enough (as to swaps - no precedent yet, so it would be prudent to assume also similar revenue losses). So if we assume that the actual volume reduction in derivatives would be more like 75% (they were larger in Sweden), then it reduces revenues by another $8.6bn (= 0.25*(4.2+7.1+23.2)).
The total amount of missing tax revenues can be therefore as large as $96.6bn (=54+26.2+7.8+8.6). This is suspiciously close to my previous estimate of the missing tax revenue based on his previous working paper (Baker 2000), i.e. $94.6 bn.
That's before we even subtract capital gains tax revenue losses and other more subtle sources of double-counting. Such as the implicit assumption of no switching to existing untaxed substitutes (e.g. away from currency futures and ETFs or bond futures and ETFs) and no switching to new OTC substitutes already developed in other countries, such as the British and Irish CFDs (stock replacement therapy)
Incidentally, I wonder how to reconcile his two estimation methods - the UK analogy by which he claims (in his latest 2010 defense) to raise $30 bn from taxing stocks alone, and his previous 2008 estimate which was... 3-7 times higher ($108.3-216.6bn)? Such huge volatility in revenues expected from the tax designed to... curb volatility?
Medico, cura te ipso!
I agree about the havoc-wreaking PhDs though... the fatal attractor of 'elegance' of closed-form solutions (ridden with simplistic assumptions) being the main culprit of most leveraged blow-ups in financial history (but I'm hardly unbiased, having failed miserably to complete mine... so my little community service here is kind of 'revenge writing'..