SKARBECK: What we need is a tax on stock transactions

December 26, 2009

The word “tax” tends to immediately raise the blood pressure of most Americans. And while the purpose of most taxes is to raise revenue for the assessing government body, taxes can also be targeted toward changing individual and corporate behavior. It is the latter outcome that is behind a renewed discussion over what is known as the “Tobin tax.”

This conceptual tax was proposed by John Maynard Keynes during the Great Depression, and was later revived by economist James Tobin in the 1970s. It suggested taxing foreign-currency transactions as a way to dissuade short-term speculation in foreign currencies. Keynes viewed the tax as a method to curb a financial world he believed had become a giant casino and which had lost sight of its role in society.

Today, governments across the globe are digging out from the aftermath of a financial system damaged by risky investment behavior. With taxpayers furious over treasuries saddled with bailout debt, world leaders are grappling with ways to repay the debt and prevent speculative behavior from destabilizing markets in the future. Under consideration and gaining clout worldwide is the concept of such a tax on stock, bond, currency and derivatives transactions.

In the United States, a bill was introduced in the House of Representatives earlier this month with the headline-grabbing title of, “Let Wall Street Pay for the Restoration of Main Street Act.” The bill calls for a 0.25-percent tax on transactions and estimates $150 billion per year could be raised, with half going to reduce the deficit and half into a “job-creation reserve.”

In September, a group of 28 business, investment and academic leaders, sponsored by the Washington, D.C.-based Aspen Institute, drafted a document titled, “Overcoming Short-termism.” They advocate that the most effective mechanism to encourage a long-term focus by investors is to create market incentives to encourage patient capital. A key recommendation was to “revise capital-gain tax provisions or implement an excise tax in ways that are designed to discourage excessive share trading and encourage longer-term share ownership.”

Supporters of the Tobin tax frame the argument as akin to a gambling tax, whereby speculative short-term trading activities, which create risk to the financial system and provide few benefits to the economy, will be taxed out of existence. Opponents believe a transaction tax will harm markets by reducing liquidity, restricting economic growth and lowering investment returns. Those arguments are blunted to a degree by the fact that the United States had a transfer tax on stock sales from 1914 to 1966 of 0.2 percent, and the markets and economy did just fine.

As currently envisioned, the tax would exempt tax-favored accounts and the first $100,000 in transactions annually. Investment strategies that would be hurt by the tax are the high-frequency trading systems that have generated billions in profits for Wall Street firms, and investors who maniacally trade in and out of securities. The tax may actually protect them from self-destructive behavior.

Implementation of a transaction tax would serve to discourage the short-term thinking and trading that dominates on Wall Street today. It would push investors and corporations to redirect their activities toward longer-term goals of creating value.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.


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