Tax Transactions!

Ditch ideology: a more technical viewpoint of taxing financial transactions

Introduction

First of all, although this is only the third line of this post, I already I lied once. It's just not possible to ditch the ideology part of questions concerning taxation. But it's still possible to add a technical viewpoint to it which is not derived from common business thinking. Not derived from common business thinking---I'm repeating that, because that's important.

Why?

[ideology warning]

The objectives of business on a global scale are skewed (You can feel, that we're here wandering around in the ideology terrain) and thus the outcome of a business thinking centered view is bound to be skewed as well. Skewed means: Whilst business should serve humans, it's humans serving business. And whilst business should provide welfare to the masses, it's the masses which through business provides the big money to some few. In developed countries, the differences between the rich and the poor are usually less dramatic, but there are still some people earning in a year what other people could not earn in a lifetime. This occurs, because people getting a lot out of the system usually are closer to defining how much they themselves and all the others should earn. Because we are greedy, the ones who have the power to give themselves a lot and others a little most of the time do so.

Taxes

It is sad to see a part of the hard-worked-for-money being taken away already before it appears on the bank account. But I admit: Taxes are necessary.

But, whilst taxes are necessary, there is a big handle in there to steer how business behaves. Taxes increase the cost of something. And this something can be chosen. Currently---especially in Europe---the one thing which is taxed the most is workforce. In a sense, a company gets punished for each of its employees. The more employees, the larger the punishment. This is of course an incentive to reduce the workforce and increase the amount of work for the remaining employees. Is that the effect we really want to achieve? Another important tax is the tax which is payed on buying things. This is not so bad. The more money you have, the more money you can/will spend, the more taxes you will pay. As long as no-one with a lot of money can avoid to pay this tax it is quite social, in a sense that those who have more pay more.  Other taxes focus on the wealth of the persons. But at the end nearly anything which can be taxed will be taxed. In this domain, politicians are very very indeed very creative.

The Aim

Before discussing what could be taxed, what should be taxed and what should rather not be taxed it is useful to define the goals which should be reached by these taxes.

The first goal of every tax is, to move a lot of money from the tax payers to the government. Many discussions are centered around the amount of money the state should take or should not take, but this is not the point I want to discuss here. And then there is the hope that the government will spend the money A) wisely and B) for the citizens. This is as well a different question.

There are some properties of taxes which I consider good ones and important ones.

• A good tax makes you pay for doing things which differ from the objectives of the society

• A good tax makes you pay for not protecting the environment (This could be seen as part of the first point if one of the societies targets is the protection of the environment)

• A good tax prevents you from getting overly rich while others get overly poor.

• You cannot escape a good tax which is designed to target you (e.g. you cannot flee from paying the tax by formally moving to a tax harbor).

I take it as given, that preserving the environment is, above being beneficial for the environment as well beneficial for the society. Hence, my favorite tax is the one on energy from non-sustainable sources (e.g. gasoline). It's easy to apply, and hits the nail right on its head. The more you damage the environment, the more you pay. Tit for tat.

My other favorite tax would be a transaction tax (also known as Tobin tax). I would not exempt anything. Plain 0.1% tax on every movement of money. While people paying their rent and buying their food wouldn't feel it at all, it would certainly hurt millisecond traders and other people who get wealthy from just moving around money from A to B as fast as they can and as often as they can. But I don't want to argue in favor of such a tax only because of my "wealthier should support the poorer" thinking. I want to bring in a more technical argument. It boils down to stability. In millisecond trading in the financial market, computer algorithms decide on buying and selling. Those algorithms are involved and complicated and are certainly non-linear. Whilst one algorithm already is complicated and its behavior is difficult to predict (although they are designed to make money, it's not what will happen all the time) there are many of those algorithms working for different companies at the same time. The authors of one algorithm don't know what features are implemented in the algorithms of the competitors although he surely tries to anticipate that. This leaves plenty of possibilities for feedback loops and thus unstable behavior. Think of one algorithm selling in panic mode, because some market markers touch the sensitive spot of the algorithm. Other algorithms recognize, that there is someone around selling like mad and start selling themselves. The market breaks down within a few trade cycles. And since all happens within milliseconds the stock index goes awry before anyone can hit a red button for full stop. There are rough cut offs in place which close the trading of the stocks of a company if the changes of value are too large, but this is just a safety net which has been put into place to save the rest of the market. This is not really a solution.

Absorb the shocks

As it works now, the stock market is kind of like a car without with a suspension consisting only of springs and missing the shock absorbers:
bad shock absorbers, broken shock absorbers

But since there are no limits on the stock markets comparable to the laws of physics which cars have to obey to (e.g. energy conservation), the algorithms can push themselves up and down mutually. Then it looks even more like that:
feed back loop

What does such a shock absorber do?

It adds friction to the system and thus reduces the energy which is stored in the springs at a bump. By removing energy from the system (dissipating the energy as heat) car will not jump up that high and will not go down so low. The car will have a better contact to the ground and the journey in the car will be more controlled and safer. The harder the shock, the more energy will be dissipated.


In my opinion, a transaction tax would be such a shock absorber, removing "energy" from the financial market system. The traders would have to think beforehand if their movement of money would be worth it---the anticipated win would have to be larger than the loss due to the tax. Some transactions would not be done and for all others a tax would be payed to the benefit of the people and the society.

As a car runs much more stable with shock absorbers, so would the stock market. Longer term investments would be favored over short term trading. Traders and their bosses would probably earn less---which I consider to be a good thing. Taxes on workforce could be reduced by the amount of taxes which is generated from a transaction tax and thus penalize less the companies employing more people (I admit, this is not very realistic).

The only losers would be those who earn a large bunch of the money in the stock (options, futures) market gamble now. They certainly would earn less (but still get stinkingly rich). Those are the ones who do control a lot of money now and everyone knows: money makes politics. Hence it is not easy to overcome their blockade. But we have to try until we get there.



You are very welcome to leave your comments! Let me know what you think.


Tax Transactions! by Peter Speckmayer is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.