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Why A Financial Transaction Tax Won't Work - GrowtoRetire

Why a Financial Transaction Tax is Bad

The years pass and I see – sometimes more than once – ideas come to live, when historically they have been tried, and then failed miserably.

Recently I’ve come across this article, where it’s said that Democrats (US) introduced legislation in the House and Senate to tax financial transactions.

US Version of Tobin Tax

Under this purposed legislation, sales of stocks, bonds and derivatives would be taxed at a rate of 0.1 percent. The tax would apply to sales made in the U.S. or by U.S. persons. Initial securities issuances and short-term debt would be exempt.

Apparently, the Joint Committee on Taxation estimated that a similar tax would raise $777 billion over 10 years. I really wish to know if these people consider that a tax like this will decrease the number of transactions. Or not.

Before this, in 2016, during the presidential campaign, Sanders called for a broad financial transactions tax, while eventual Democratic presidential nominee Hillary Clinton called for a tax specifically on high-frequency trading.

Why Will This Fail. As Always.

Now it’s time for some history. One with facts and evidence. Did you ever hear the story of Sweden’s financial tax in the 1980s?

This was basically a 0.5% financial transaction tax (FTT) applied to equity securities, fixed income securities and financial derivatives between 1984 and 1991.

  • First of all, if you purchased and sold some security the transaction would be taxed at 1% (0.5% + 0.5%).
  • In July 1986 the rate was doubled. Also, the tax base was broadened to cover share options and convertibles.
  • January 1989 a (much) lower tax of 0.002% was defined to fixed-income securities with a maturity of 90 days or less. Five years or more the tax was 0.003%.
  • 15 months later in April of 1990, the tax on fixed-income was abolished (oops!).
  • January of 1991 all remaining taxes were cut in half.
  • End of 1991 all remaining taxes were abolished (Mega oops!).

In conclusion, this idea was so good, that 7 years later was totally destroyed. Down in flames. Game Over. Failed spectacularly.

Why? If This Idea Was so Perfect, Why God?

Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.

Albert Einstein

Let’s hear it from the former finance minister of Sweden, Anders Borg, on why this US idea won’t work (nor the similar European financial transaction tax):

When Sweden began taxing financial transactions in the 1980s, “between 90%-99% of traders in bonds, equities and derivatives moved out of Stockholm to London,” (BBC)

Ouch! And remember, this happened in a time where the outflow of capital from Sweden was limited by foreign exchange controls, which meant that Swedish investors were restricted in moving capital to foreign markets.

“The impact was basically that we did not get any tax revenue. It brought in very little tax money while moving most of the businesses outside of Sweden. We abandoned [the tax] because it was a very, very bad functioning tax.”

What happened exactly?

When the tax was raised, the trading volume on the Stockholm stock exchange changed dramatically. Average turnover fell 30 per cent during the second half of 1986 and throughout 1987. 60% of the trading volume of the 11 most actively traded Swedish stocks moved out.

This is not “ending speculation” while “raising more money for government”. This is killing the market. Plain and simple.

When in 1989 the tax base was broaden to include bonds, the end result was spectacularly worse: 85 per cent reduction in bond-trading volume and a 98 per cent reduction of trading volume in bond derivatives. To quote Nico Vega:

Bang bang, he shot me down
Bang bang, I hit the ground
Bang bang, that awful sound
Bang bang, my baby shot me down

Yes, the Swedish government just killed the bond market. And without mercy.

Add Insult to Injury

The increase in tax revenues was less than 5 per cent of what had been expected. Therefore in the example above, if the tax man was expecting $777 Billion, the end result would be actually nearly $39 Billion. While dismantling the stock and bond market in the process.

By 1990 more than 50 per cent of the trading in Swedish shares had moved to London. To quote again Nico Vega:

Now he’s gone, I don’t know why
Until this day, sometimes I cry
He didn’t even say goodbye

This Swedish long and failed experience should teach other policy makers around the globe about taxing these transactions. But somehow, these ideas always find a way to keep walking. We should name it: Walking dead ideas. Honoring that great TV show.

I only hope that the next one to turn this walking dead idea into law doesn’t take 7 years to assume his mistake. Let’s hope for the best.

And, you reader? Do you know some walking dead idea? Share with us in the comment section. Also if you found this article useful, share it!

Why A Financial Transaction Tax Won't Work - GrowtoRetire #investing
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About GTRetire

GTRetire is the founder of GrowtoRetire, a blog about financial independence and early retirement. Click here to learn more about starting a blog! Also, this post may contain affiliate links, please read the disclaimer for more info.

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