A tiny tax on foreign exchange transactions

1. 20 August 2015
US free marketeers should
support the Robin Hood Tax
By Alex Verkhivker and Hugo Winn
! Andrew Burton / Getty Images
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The idea of a Robin Hood Tax – a tax on the purchase and sale of securities
and derivatives – is hardly new. Since Hunter Logan proposed the idea in
1998, everyone from Bill Gates to Pope Benedict XVI has endorsed it. The
European Union is set to impose their version on banks by the beginning of
next year.
Yet the idea of imposing a tax named after a man who stole from the rich
and gave to the poor has always sat uneasily with those defending the free
market. Despite increasing acceptance in Europe, in the US Democrat and
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US free marketeers should support the Robin Hood Tax"
A Financial Transaction Tax improves liquidity in the capital markets"
FTT has wide support from Bill Gates to Pope Benedict XVI"

2. Republican free marketeers are vehemently opposed to the tax. This is a
huge missed opportunity. Financial markets have never been, nor ever will
be, wholly free. Furthermore, it is not incompatible to believe in open
markets and hold a desire to protect financial institutions from excessive
risk and leverage.
Earlier this year Congressman Chris Van Hollen announced he had found a
level of tax which would have no effect on an investor’s future trading
behavior and overall portfolio. The tax had the capacity to raise over 1.2
trillion dollars, revenue equal to 0.5 percent of U.S. GDP.
Free marketeers often shudder at the notion of regulation. But what they
forget is that it is not just over-regulation that skews functioning markets.
The rise of high frequency traders, who now make up more than 50 percent
of all trades in the equity markets, make markets dangerously volatile and
have the effect of either over-valuing or de-valuing certain asset classes.
This split-second behavior; the flash trading and noise trading of Wall
Street, is undoubtedly the greatest threat to rational market participation.
It is the cause of the 2010 flash crash and many more besides.
To make big money from high frequency trading, traders must execute tons
of trades. Such excess volume will undoubtedly become too costly for such
traders, even with a financial tax that is only a few basis points. By taxing
high-frequency trading, the incentive to speculate is minimized. Adding
even the minimal FTT advocated by Rep. Chris Van Hollen could stem the
activities of various flash traders around the globe.
Crucially, a FTT also has the added effect of improving liquidity in the
capital markets. And the more liquidity there is the more confidence
participants will have in investing. In this way, the Robin Hood Tax would
improve the flexibility and robustness of markets, rather than reducing
their efficiency.
To be clear, the Robin Hood Tax will not dampen all trading activities.
Rather, its aim is to minimize those trading activities such that its levels
revert back to those of the mid-1990s. Trading volume in this era was
much lower, but nevertheless highly liquid and prosperous.
Critics of Van Hollen’s tax, including a majority of Republicans and a vocal
minority of Democrats, will tell you that the tax lowers trading volumes,
reduces liquidity, price discovery and future investment funding in the
process. They rarely, if ever, mention the effect on speculative trading –
the sole form of trading that stymies liquidity, price discovery and
investments. It is only Van Hollen who recognises that without reducing
financial speculation, it’s impossible to address inequality or to leave Wall
Street’s risky practices in the past.
One metric for addressing the issues of liquidity, asset pricing and
investment is the bid–ask spread. Undoubtedly, the FTT would raise bid-

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ask spreads. Academics have argued, however, that there would be minimal
cost effects from changes to the bid-ask spread.
Dealing with the realities of capital markets requires regulators to
acknowledge that high-frequency traders are more likely to be market-
manipulators rather than market-makers. Post-crash USA is still finding
its feet after its biggest financial quake for half a century and questions
over how far the big banks should or should not be taxed remain
contentious. The crucial step now is for US voters as well as Washington
regulators to recognize that a Robin Hood Tax is not anti-market in the
slightest. Instead it is best way to make capital markets fair for everyone.
Alex Verkhivker is a contributor to Capital Ideas at The University of Chicago Booth School of
Business. In prior work, he has worked as an economic researcher with the Federal Trade
Commission in Washington and as an Associate Economist at the Federal Reserve Bank of
Chicago. You can follow him on twitter @averkh.
Hugo Winn is a political consultant at Weber Shandwick specialising in campaign strategy and
political risk.
This article is an exclusive for CapX, and is available for syndication. Please contact
editors@capx.co to discuss details.
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US free marketeers should support the Robin Hood
Tax
"
A Financial Transaction Tax improves liquidity in the capital markets"
FTT has wide support from Bill Gates to Pope Benedict XVI"