Eliot Spitzer: Tax the Traders! It Would Solve Economic Crisis and Stop Reckless Activity

[Vox Populi]

34. here's why it's a dumb idea

First, in your wikipedia cut/paste, you bolded sections that are irrelevant. I'm not sure what point you were trying to make, but the fact is that stamp duty is still applied to stock transactions in UK. The line you missed says: "Apart from the transfers of shares and securites..."

The proposed financial transaction tax, while it may not be called a Stamp Duty, is exactly the same as that applied in England. It is a tax based on the value of the asset. As I said, this will not work. You asked why Goldman would be exempt: because they are market makers - as such they have an obligation to make a market. The market simply would not operate if market makers were obliged to pay the tax. They would necessarily be exempt. There are financial products that would also be necessarily exempt, e.g. forex transactions. These would be exempt because imposing a tax on a forex transaction would be ian illegal imposition of tax on a person outside of the US tax jurisdiction - ie. the foreign counterparty. This loophole would quickly be exploited. In a similar way to UK's invention of the CFD as a non-asset-based proxy for stock transactions, how long do you think it would take for Goldman to create a synthetic currency product that would be exempt from the tax and would mirror the movement of the S&P 500, for example? Not long at all. This type of innovation and/or the relocation of trading overseas is why the estaimtaes of potential revenue from this tax are ridiculously overstated.

I put forward a workable alternatve that achieves the desired goal of restricting the high-frequency trading that now dominates the market in index futures and is only possible as a strategy by the large banks that the tax is meant to punish.. Instead of basing the fee or tax on the value of the underlying asset, tax the transaction itself. This would make HFT less profitable because of the additional frictional cost while not imposing the burden on small investors - only large frequent traders would feel the impact and this solution would not have the effect of encouraging trading to simply move to a more favorable overseas location. Market makers would still be exempt from this fee in their role as market makers but the fee should be applied to their proprietary trading operations.
There seems to be an unwholesome view that the stock market is inherently evil - it is not. What is wrong is that the large banks and hedge fnds with colocated servers have an unfair advantage over all other traders by receiving the quote and order book information ahead of anyone else. It's important to realize that what they are doing is not simple arbitrage (which is in itself a valuable function that corrects mispricing) but is cheating - they take advantage of order imbalances before they are visible to other market participants.
A transaction fee would reduce the profitablity of this HFT strategy perhaps making it untenable - this is the desirable result.

I have no idea why you mentioned a Federal Real estate Transfer Tax - that has nothing at all to do with my comments.