Which assets to tax? Let logic, instead of tradition decide..

One of the ideas out of the Sarkozy-Merkel meeting that got the most critic was that of a tax on financial transactions. Turning on the tv (Bloomberg) there was a suited trader screaming with anger that taxing the stock exchange just didn’t make sense. “Do they want to curtail this as well?” he fulminated.

Well, the problem is, state need to tax something.

You could quite as easily say that taxing employees doesn’t make sense. There already is a lot of unemployment and taxing income reduces spending power, something lacking in the economy right now.

We’re not aware whether there were any specifics to this proposal, but if it indeed would be taxing financial transactions on markets, would that be so bad?

• Most of the volume of trade is computer generated these days, throwing some sand in these wheels might actually be beneficial. The case for arguing that all that trading creates any value is extremely thin and it might very well produce more problems than value (instability in markets, flash crashes, etc.)
• Just because the sheer volume of transactions, the incidence of these tax would almost certainly be very small. The tax per transaction can be very low and still produce some meaningful tax income.

In today’s economy, with mass unemployment but a still thriving financial sector where making money with money is much less taxed and people like Buffet (to his own bemusement) pay considerably less taxes than their secretaries, this isn’t such a crazy idea as it might sound at first notice.

The impact on the financial sector is likely to be rather minimal, and some would say that the rise of the financial sector the last 25 years has contributed little to the real economy, even if it made some people very rich. The last five years it has made many more people unemployed or poor (or both).

There might be some practical problems (and expect the financial sector lobby to blow these up out of all proportion). Capital is very mobile, it can disappear at the click of a button. But the advantages of a deep and liquid markets are not likely to be trumped by a tax that will be but a fraction of a percentage point.

And it’s good to see we’re not alone on this..