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Financial Speculation Tax

Financial Speculation Tax

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Published by Peter Zylstra Moore
This paper looks at how financial speculation taxes can increase the cost of short term financial transactions making long term investment comparably more profitable, as well as recover some of the costs that bank speculation and failure heap on the average tax payer.
This paper looks at how financial speculation taxes can increase the cost of short term financial transactions making long term investment comparably more profitable, as well as recover some of the costs that bank speculation and failure heap on the average tax payer.

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Published by: Peter Zylstra Moore on Feb 02, 2011
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Peter Zylstra-Moore2010Financial Transaction Taxes:
Making Finance Work for the Real EconomyThe recent collapse of the American housing market caused a domino-effect of subsequentstock market and banking collapses, eerily reminiscent of the Great Depression. An enormousfiscal stimulus combined with government bailouts for failing institutions appears to have at least prevented the crisis from deepening. With the collapse, public criticism of Wall Street and therecognition of real class conflict have become almost in vogue. Unfortunately, this crisis is notreally unique but rather the most recent incarnation of an increasingly volatile and internationallyfocused financial sector. While some form of fiscal stimulus and institutional bailouts werenecessary to lessen the impacts of the crisis, these measures in themselves do nothing to guaranteethat something like this will not happen again. The financial sector needs to be re-regulated. Oneway of doing this is to tax financial transactions. Financial Transaction Taxes are an achievableand beneficial, progressive and stabilizing tax that ought to be publicly popular in a real socialdemocracy.This paper first looks briefly at the increasingly crisis prone nature of deregulated finance.It then examines the need for a Financial Transaction Tax (FTT) as one important tool in re-regulating finance. It will look at the benefits of imposing a financial transaction tax as amechanism for increasing the cost of short-term transactions and therefore encouraging more long-term financial activity, and as a mechanism for collecting the necessary tax for recapitalizingfailing institutions, and stimulating economies during recession. Because the US has repeatedly been near the centre of financial institutional failure, this paper will predominately focus on whatthis tax could look like in the US. It will also consider a number of criticisms of this tax and the practical possibility of gaining public and political support for a Financial Transaction Tax. Finally
 
this paper will examine democratic failures in the media and political systems rather than lack of  public appeal as the strongest reasons FTTs have not been implemented.
Instability and Neoliberal Deregulation
Throughout the neoliberal era, deregulation combined with the un-bordering of finance andfloating currencies have arguably caused a significant increase in both banking and currencycollapses
.
Compared to the record during what is known both as the Keynesian era and the goldenage of capitalism these numbers are astounding. In developing countries where the movement of financial monies can actually dwarf the size of the economy, the result is incredible financialinstability. From 1945 to 1971 there were only 17 banking and/or currency crises in developingcountries. From 1973-1997 there were 95 crises, an increase of almost six-fold.
1
Many of thesecountries faced economic and employment declines similar to those of the Great Depression,however because these depressions mostly affected the world's poorest populations they receivedlittle media attention. Beginning in 1999 with the American Stock Market Bubble, and leading intothe most recent economic crisis it would appear that the proverbial chickens of our financial policies are finally coming home to roost. Even where currencies are not collapsing, constantrevaluation of currencies has left businesses in Canada, for example,
2
with drastically changing profit margins. This has only fuelled further business departure to Asian countries wherecurrencies are often controlled and more predictable (and where the heavy hand of the statesilences labour).Obviously, increased financial liquidity allows for a more temperamental economy marked1
Eichengreen, Barry and Michael D. Bordo,
Crises Now and Then,
National Bureauof Economic Research, 2002, available athttp://faculty.oxy.edu/mcintyre/Econ495-F04/Eichengreen+Bordo-Crises-NBER-w8716.pdf
2
Managing the exchange rate was ranked the biggest problem(28%) problem forimproving exports for Canadian businesses, see
Canadian Manufacturing Sector Trends and Challenges,
http://cmte.parl.gc.ca/Content/HOC/committee/391/indu/reports/rp2663393/indurp05/en/09.html
 
 by booms and busts. As Keynes suggested, financial markets are not about fundamentals but rather about outguessing market sentiment through, “anticipating what average opinion thinks averageopinion to be.”
3
Highly liquid financial markets “promote speculative trading practices that distort pricing, resource allocation and investment, creating imbalance between financial and real activity,and thereby contributing to macroeconomic instability.” They accomplish all this while stillremaining privately profitable for speculators.
4
It may be easy to make a profit by taking moneyfrom a country with low interest rates and moving it for a day to a country with high interest rates, but it is not in most cases beneficial to either economy. The system is built so that people whohave the resources to play and even manipulate the market can make incredible short-term gains.For example, it was recently revealed that Goldman Sachs knew that its mortgages were over-ratedand so it sold securities for these mortgages which allowed it to continue to benefit from thehousing market bubble while it grew, and not be on the hook for the failed mortgages after theycollapsed.
5
As markets prioritize short term investment, businesses also are forced to prioritizeshort term profits in order to keep investment.If increased liquidity leads to faster growth, we may choose growth over stability.However, after comparing the competing evidence around liquidity and growth, Robert Pollin,Mark Shaberg, and Dean Baker concluded that once research is controlled for outliers, “nostatistical evidence exists at all to support the claims that countries will enjoy faster economicgrowth through more liquid stock markets.”
6
3
Keynes, John Maynard,
The General Theory of Employment, Interest, and Money.
New York: Harcourt Brace & World, 1936, pg 156
4
Baker, Dean, Marc Shaberg, and Robert Pollin,
SECURITIES TRANSACTION TAXES FOR U.S. FINANCIAL MARKETS, pg 530,
http://college.holycross.edu/eej/Volume29/V29N4P527_558.pdf
5
How Goldman Secretly Bet on the US Housing Market Collapse,
http://therealnews.com/t/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=4406
6
Baker, Dean, Marc Shaberg, and Robert Pollin,
SECURITIES TRANSACTION TAXES FOR U.S. FINANCIAL MARKETS,
http://college.holycross.edu/eej/Volume29/V29N4P527_558.pdf

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