Sanders' financial transaction tax proposal - do the numbers make sense?

[hill2016]

A financial transaction tax is very appealing to his supporters. It's the proverbial money tree: it can raise huge amounts of money and it can do so very painlessly (only harms the evil hedge funds and banks instead of normal people like you and me). Plays right to his image of striking against the fat cats at Wall Street and evil high frequency traders.

Only problem is how much money can it really raise? I would welcome anyone to challenge my analysis without resorting to name-calling.

According to his website, http://www.sanders.senate.gov/download/collegeforallsummary/?inline=file it could raise "hundreds of billions of dollars a year".

Let's analyze this thoughtfully.

(1) Firstly, let's agree on the principle that in order for people to be willing to pay the tax, they must be making much more than the amount of the tax in profits. Let's assume that people are willing to put up with a 60% effective tax on their profits. I'm not even considering the fact that profits are also taxed through corporate taxes or short-term capital gains taxes, in addition to state/local taxes.

(2) Secondly, let's try to look at some hard upper limits on the total earnings from the public financial sector. Bear in mind that a lot of these earnings have nothing to do with high frequency trading but other banking activity e.g. credit cards, asset management, interest from loans, investment banking, etc. Also bear in mind that increasingly a lot of prop trading has been driven out of banks by the Volker rule.

https://www.fdic.gov/bank/analytical/quarterly/
FDIC-insured institutions had net income of $40b in Q1. Let's assume $160b over a year. This includes small community banks and large money center banks.

http://graphics.wsj.com/quarterly-bank-earnings/
Looking at the top six banks, they earn about $25b in net income in a quarter or $100b a year.

http://equity-research.com/list-of-top-200-investment-banks-and-boutiques/
Looking at just the investment banks the US firms in the top 10 list earn about $60b in net income a year.

The entire S&P 500 earns about $1 trillion+ in earnings a year.

So perhaps a very generous upper bound on the total net income of the public financial industry is about $300b. As mentioned before, most of this would be non trading related activity (normal consumer, commercial and investment banking stuff). Most banks are getting rid of their prop desk.

If you recall JP Morgan's London Whale (which is the kind of prop trading we are talking about), they lost $7b for the bank, which was a big deal for them.


(3) Thirdly, on to the evil hedge funds. Again let's try to establish some upper bounds on their total profits (I'm using profits here to mean performance instead of actual incentive fees).

The hedge fund industry is about < $3 trillion. Average performance is about 10% a year. Let's say the total performance of the hedge fund industry is $300b a year. There are going to be some managers who are successful and those who fail. There are going to be some managers with very low returns and some people with very high returns. Also we are assuming all this is generated in US markets (as opposed to overseas markets).

Now this performance doesn't just go to the pockets of the hedge fund managers. At the end of the day, this performance belongs to the investors, who are going to be mainly pension plans, foundations, endowments, etc. Remember one goal is to hurting "normal" people. So we need to give them an exemption from this tax.

Also, a lot of this performance isn't generated by high frequency trading.


(4) So in conclusion,
1. The entire US banking sector earns on the order of $300b a year, the vast majority of which is normal banking stuff (consumer, commercial, and investment banking) instead of prop trading.

2. The entire hedge fund industry's performance is about $300b a year, which belongs to their clients. Most of this performance isn't generated by high frequency trading and we want to exempt the right kind of investors (pensions, foundations, endowments).

5. Finally, the last piece of the parcel is that we you raise tax on an activity, you generally reduce such activity.

So, how does Bernie raise "hundreds of billions" from his financial transactions tax?

[1939]

1. What is the daily volume (in dollars) on the various stock exchanges?

Multiply that by 1% or 2% (or whatever the tax rate is and you have the answer.

Of course, as the rate goes up, it provides a disincentive to frequent trading (maybe not a bad thing).

[hill2016]

2. as I mentioned

at the end of the day you need to generate enough profits to pay the tax.

If high frequency trading isn't worth it people will stop doing. Hence the daily volume is irrelevant.

[JackInGreen]

18. So you would factor out

Quantative trading?

[hill2016]

19. I've included

both hedge funds and banks' prop desks in this analysis.

There's an upper bound to how much revenue Bernie could raise with his proposal and it's nowhere what he claims it will be.

[JackInGreen]

20. I'm sorry

I think you're full of it. But life to get on with and not a lot of time so, enjoy.

[hill2016]

21. like I said in my OP

I would welcome anyone to challenge my analysis without resorting to name-calling.

sorry you weren't able to do that

[JackInGreen]

23. I didn't call you any names

I said you're full of it. As in malarky. Or bull.
If that's name calling I'm a monkeys uncle. Carry on feeling good about the lack of response though.

[hill2016]

25. difference

without a distinction.

Let's try again. Specifically which part of the analysis do you disagree with?

[JackInGreen]

26. No time for love doctor Jones

Maybe later.

[hill2016]

27. ok

I'll be waiting

[PoliticAverse]

3. Financial transaction taxes tend to raise less money than forecast,

sometimes greatly less. The problem is the (5) you've cited and also the loopholes
usually found in such taxes which enable most participants to avoid them.

For more info see: https://en.wikipedia.org/wiki/Financial_transaction_tax

[rogerashton]

4. Where did this come from?

Let's assume that people are willing to put up with a 60% effective tax on their profits.

The tax rate mentioned is 0.5%.

Now, I have to say that the proposal of a "Tobin tax" on stock trades as a fund-raising measure is misconceived. The purpose of a Tobin tax is to discourage high-frequency and speculative trading. If it succeeds 100% then it raises no money. But it won't succeed 100% -- some stock trading will take place. But nobody knows how much it will raise.

What we need is a wealth tax. To the best of my knowledge, Bernie hasn't proposed that. The problem is that he is too conservative, but, hey, he's the best we've got.

[hill2016]

5. you're confusing two things.

The tax rate on the total transaction size against the effective tax rate on the profits.

Let's assume we have a high frequency trader who buys $100 worth of stock and sells it 10 seconds later for $100.20. He just made twenty cents in profits. Under the financial tax, he would have to pay $0.50 when buying and another $0.50 when selling. He would have to pay $1 in the high frequency tax when he only made 20 cents. In addition he would have to pay short term capital gains taxes. Clearly he's not going to do this for very long.

The 60% refers to what share he's willing to pay the government.

So maybe now he makes $1.60 instead on the trade and pays $1 in the financial transactions tax. At the end of the day after the financial transactions tax he only makes 60 cents as he's paying roughly 60% effective tax rate, excluding capital gains taxes.

By the way, in reality, high frequency traders aim for 0.01% in profits for each trade. A 1% two way tax would instantly kill high frequency trading. Maybe this is good for the market but let's not think we can actually get a lot of money from such a tax.

[rogerashton]

6. So you just made it up.

I don't see any reason to think that anybody is "willing" to pay 60%. Where-ever the 60% comes from -- imagination, I suppose.

But I agree that the money raised by a Tobin Tax is unpredictable at best, since that is not the purpose of such a tax. As I said, we need a wealth tax, but Bernie is too conservative to support that.

[hill2016]

7. yeah

but if the number is lower, let's say people are only "willing" to pay 50% of their profits (excluding capital gains) to this financial transaction tax, then the amount that can be raised from this tax goes down even more.

My point really is that the numbers that Sanders claims can be raised is far too much.

[PoliticAverse]

8. A wealth tax at the federal level would likely require a constitutional amendment. n/t

[hill2016]

11. why would it?

tax policy is squarely within Congress' domain.

[PoliticAverse]

12. The Constitution limits Congress' taxing power.

Do you think the current Court would find a wealth tax constitutional?

Note that the Income Tax required passing of the 16th amendment.
https://en.wikipedia.org/wiki/Sixteenth_Amendment_to_the_United_States_Constitution

[Armstead]

9. You may be correct but....

...this is more a goal than an exact blueprint.

Like all detailed proposals by candidates, this is not likely to fly in its current form. All of these detailed "plans" issued by politicians -- no matter what candidate --tend to be pie in the sky stuff that a candidate would like to do and/or thinks voters want to see happen. But they rarely -- if ever -- see the light of day in their exact form.

That's standard operating practice in politics.

But what they do achieve is show a broad outline of a goal the candidate is likely to work towards in office. In this case the idea that college should be available to everyone as a "public good," and that it should be financed by restoring some of the obligations that those who are getting obscenely wealthy off the system have managed to avoid.

It would likely be changed, or partially fulfilled, once it is placed in the DC meatgrinder. But it is part of a multifaceted goal of restoring the balance between public responsibility and private gain that existed during this country's greatest period of prosperity.

[hill2016]

10. yeah but

the problem is that most of his supporters think he's "sincere" and "above politics". That's part of his appeal (the other part of his appeal is promising free stuff to people who support him). Lots of his supporters actually believe he's going to deliver what he promises.

Whereas a politician like Clinton, who actually knows her way around DC, and who tries to make more realistic plans, gets jilted for not being bold enough, even when she tries to work within the framework of what's realistic.

Yeah sure wouldn't I love to vote for someone who can promise me free housing/education/health care. Reality is that someone has to pay for it which is the part often glossed over.

[rogerashton]

13. Well, at least you didn't make that line up:

(the other part of his appeal is promising free stuff to people who support him)

You borrowed that one directly from Romney.

Well, I expect to vote for Hillary, but it is hard to imagine a thread that shows her supporters on DU in a worse light than this one does.

[Armstead]

14. Difference I see is that the Deemocrats gave up even trying 30 years ago

On my original point, all politicians almost have to over-promise. No one is going to say "Vote for me, and I'll do absolutely nothing."

(Well, maybe the ultimate GOP conservative candidate would....but you know what I mean. Even Regan, whose basic job was to make the government do as little as possible, promised to bring Morning in America....etc.)

The important thing is what problems they identify, and what die goal and direction they set. Bernie's no different. The important thing is what direction their goals and plans are.

What many of us like is that Sanders is a contrast to the non-message of the Democratic Party, and the lack of large goals. The only things they're really done have been mild tweaks that avoid real core problems and solutions, and have been variations of GOP "free market conservative" solutions.

So, no, I think most are realistic enough to know that we wouldn't "free college for everybody paid for by the wealthy" a month after he was elected. But he would set that as a goal -- as part of a larger agenda -- and fight for it. Which is ultimately simply a restoration of clear liberalism that Democrats abandoned since 1980. That is necessary if we are to reverse the disaster that GOP conservative "free market supply side" approach to everything has created.

[Armstead]

16. You're stereotyping

I wrote a longer reply...but I decided to be equally simplistic.

Your complaints echo conservatism and people like Paul Ryan.

"We can't pay for anything, so we'll just send people on the margins to the wolves, and further torture the middle class."

"Retirement program for old people called Social Security? Gosh we can't pay for that"......"oh here's another tax break Mr Billionnaire. Here's another subsidy, Mr Wealthy Corporation"

[hill2016]

22. in your view

should politicians come up with a way to either pay for something new OR state what they'll cut (existing programs)?

[Armstead]

32. I think if you look at his overall programs and message....

you'll see where he would cut and how he proposes to raise money.

I am not a financial guy or an economist, so I am not going to get into the weeds on that particular proposal. It's possible it would work, it's possible not as you presented it. You'll have to find someone more expert than I...Or, better yet -- if you really ant to know, contact his campaign and ask for an explanation.

However, I am smart enough to know that we have a tax system that has been rigged over the last 30 years to deplete government by tax scams, corporate subsidies, and our economy has gotten totally skewed by the hyperactive and shady investment vehicles.

And Sanders is clear about his priorities, including things that can be cut or reduced and realigned to move towards a more balanced system that does not bleed from unaccountable pirate hyper-capitalism. That is not "pie in the sky." It was more balanced in the past, in terms of corporate responsibility and a more progressive tax system. IT can be again, of we exercise the will to do it.

So yeah, he's a politician. But also yeah, other candidates, including Clinton, make big promises. On balance, I trust Sanders, not on blind faith butt a knowledge of his record and his character. And if yuo look back, he was very prescient about many things that happened, when most politicians either gad a lack of foresight or chose to ignore them.

[SonderWoman]

15. Great analysis. Bernie is going to have to....

Come up with better policy than just taxing the rich and expanding the govt. He's going to have to admit that in order to actually implement his policies, everyone's taxes will have to go up, including the middle class and poor.

[hill2016]

24. thank you

Unfortunately once he says that my guess is that his support evaporates.

That's why he's not talking about the cost part of his platform at all.

[hill2016]

17. just wondering

where are all the Sanders supporters?

[daleanime]

28. Well, you convinced me....

to put DU up for the night and go to bed.

Don't worry, I'll say an extra prayer for the poor hedge fund managers. May they get what they deserve.

[Motown_Johnny]

29. The tax would need to increase the cost of doing business for some investors

by roughly 50%-75%.

If you can raise about half of that $600 billion that you quoted it would be about $300 billion. That is the high end.

Because some investments would be exempt you need to round that down. Of course, those long term investments, like pensions, are not the traders being targeted anyways. It is the companies that do things like build a fiber optic system to gain information a few milliseconds before anyone else and then make transactions within those milliseconds that are sure bets for them.

Anyways, $200 Billion a year is not an unthinkable number. It would depend on exactly how the tax is structured, but it is clearly possible.




Context:

http://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street

^snip^

Too Fast to Fail: How High-Speed Trading Fuels Wall Street Disasters

Computer algorithms swap thousands of stocks each instant—and could set off a financial meltdown.


Spread is part of a growing industry dedicated to providing hyperspeed connections for financial firms. A faster trader can sell at a higher price and buy at a lower one because he gets there first. A connection that's just one millisecond faster than the competition's could boost a high-speed firm's earnings by as much as $100 million per year, according to one estimate.

Because of this, trading firms are increasingly pushing the limits to establish the fastest connections between trading hubs like New York, Chicago, and London. Every extra foot of fiber-optic cable adds about 1.5 nanoseconds of delay; each additional mile adds 8 microseconds. That's why companies like Spread have linked financial centers to each other by the shortest routes possible. Spread's Alpha facility is one of more than a dozen similar centers arrayed along the path of its 825-mile-long, $300 million fiber-optic cable between Wall Street and the Chicago Mercantile Exchange. Spread reportedly charges traders as much as $300,000 a month to use its network. Exchanges like the NYSE charge thousands of dollars per month to firms that want to place their servers as close to the exchanges as possible in order to boost transaction speeds. Industry experts estimate that high-speed traders spent well over $2 billion on infrastructure in 2010 alone.




P.S. These bastards need to be taxed!

[hill2016]

30. sorry

the $600b includes lots of other things that are not related to high frequency trading. Things like bread-and-butter bank stuff such as making money on loans, credit cards, etc.

[Motown_Johnny]

31. which is why I said half, and then rounded down

but it could be done. If you noticed that article, it said that each investment firm can increase it's earnings by $100 million a year for one millisecond increase in speed.


I would need to look up how many high speed investment firms there are out there to be taxed, but taxing them looks good to me.

It is impossible to know what the numbers are without the bill being written, but that $200 billion number could be possible.

[virtualobserver]

33. $70 billion is the estimate of needed funds to provide free college in all public univ.

that I have seen.

[DJ13]

34. Any tax that would slow the rate of high frequency trading sounds good

The markets are out of control in the sheer volume of short term trades, so even if the amount of tax generated isnt that high it will STILL be worth it to stabilize the markets.

[think]

35. Please see this memo from Political Economy Research Institute University of Massachusetts-Amherst

This memo states the institutes estimates for revenue from a financial transaction tax utilizing the same taxation rates Bernie Sanders is proposing:

Memo to Robin Hood Tax Coalition

Thoughts on Tax Rates and Revenue Potential for Financial Transaction
Tax in U.S. Financial Markets

Robert Pollin and James Heintz
Political Economy Research Institute
University of Massachusetts-Amherst
March 2, 2012
(with references added 6/9/12)

~Snip~

We assume that, due to the
imposition of the FTT at the rates we propose above, trading
volume will fall no more than 50 percent relative to current levels of trading. For purposes of
our calculations, we assume that trading volume does fall by 50 percent in all financial markets.
Revenue Generated

Proposed Tax Rates and Revenue Estimates

We will first state our conclusions, then provide some, though not all, of the underlying
reasoning behind these conclusions.
Proposed Tax Rates

Financial Instrument Proposed Tax Rate

Stocks 50 basis points
Bonds 15 basis points
Derivatives 0.5 basis points
Assumption on Trading Volume

Financial Instrument Revenue Generated

Stocks $62 billion
Bonds $170 billion
Derivatives $120 billion
TOTAL $352 BILLION

Analysis and Evidence to Support Conclusions

Evidence tied to the UK Stock FTT

In our view, the single most reliable piece of evidence for assessing the impact of an FTT
for U.S. financial markets is the existing FTT that operates on stocks in the United Kingdom.
The UK stock FTT is set at 50 basis points. A 50 basis point FTT was also the proposal that was
made for the United States in 1987 by then House Speaker Jim Wright. Wright’s proposal was
supported by then Treasury Secretary Nicholas Brady and then Budget Director Richard
Darman, who were working under Republican President George H.W. Bush.

~Snip~

http://www.peri.umass.edu/fileadmin/pdf/ftt/Pollin--Heintz--Memo_on_FTT_Rates_and_Revenue_Potential_w_references----6-9-12.pdf

Further information about the Political Economy Research Institute University of Massachusetts-Amherst can be found at their website:

http://www.peri.umass.edu/ftt/

It appears to be in reference to a request from the Robin Hood Tax Coalition in 2012:

http://www.robinhoodtax.org/

The Robin Hood Tax Committee site is a great resource for information in regards to the tax.

[booksandpencils]

36. The FTT was tried and failed in Sweden

However, there are a key few differences that will make it viable here in the US. The big problem in Sweden, was that traders there simply moved over to the London and New York markets, pulling their money out of the country. But would Wall Street do the same thing? Move their money out of the largest market in the world? And go where? London? China? Germany?

Do you really think Wall Street addicts will stop trading over .5%?

I do wonder about the 16th Amendment, which seems to state taxes can only be collected from income. But Americans are stick of the status quo, sick of corporations, sick of the 1%. It doesn't seem right one little line in an old document should stand in the way of our kids getting free college.