By: Scott Redler
Here at T3Live, we believe in market based solutions to economic problems; however, with politicians responding to populist backlash against the Wall Street community we fear the misguided trader tax poses a serious threat to U.S. equity markets. Such a tax on transactions could seriously impact the liquidity of our markets and generate inefficient pricing. Had this tax been in place during 2007-2009 it would have greatly exacerbated the problems experienced during the market’s crash and further panic would have ensued.In England, they will enact a greater than 50% one-off tax on bonuses amounting to over 150,000 Pounds ($244,333). While it seems inevitable that some sort of retribution will be taken against Wall Street to account for the losses suffered by society and U.S. taxpayers, we believe that the British approach offers a far better alternative—we should initiate a one-off windfall tax on bonuses over a certain amount at any financial institution that was a beneficiary of the TARP program.
The arguments in favor of a transaction tax range from forcing Wall Street to pay for the TARP, to reallocating our workforce and resources away from the finance industry to encouraging investments on a larger time-frame. At T3, we believe that this one-off tax will effect the change that Washington is looking for far more equitably than a tax on transactions. In the U.S., we propose that such a tax would fall ONLY on the bonuses paid out by TARP recipients to their employees. This would be a much more targeted way of forcing Wall Street to pay back U.S. taxpayers for the bailouts.
When a law or tax targets one particular subset of society, it is essential that the law does not yield overbroad consequences. What that means is the law must affect ONLY those who that law actually seeks to effect. Wall Street traders and Main Street investors would all be negatively impacted by the transaction tax without ever having played a role in the collapse of the financial industry. In fact, these people were victims of last year’s financial collapse. Had it not been for the liquidity available in U.S. markets, many investors would have been unable to quickly alter the components of their 401ks or personal investment accounts.
If there is one thing that market participants learned and confirmed during the past two years it is that the traditional “buy and hold” method of investing does not work. A buy and hold investor would have generated a net negative return over the past ten years. Investing in this day and age requires constant tinkering and the efficient reallocation of capital. This has broader consequences for the smaller investor and society at large. When supposedly knowledgeable analysts tell Main Street to “get out of the market for five years” it is clear that a larger problem exists. Without the ability to quickly readjust equity portfolios, we will not see the efficient allocation of capital at any level of the investment universe. Liquid investments and markets would receive preference over illiquid ones, rather than the best ideas receiving preference over weaker ones.
A windfall tax on bonuses would far more effectively solve the problems that politicians are seeking to address. First of all, the cost to taxpayers should be borne by the institutions who actually reaped the benefits of government intervention, and not by innocent bystanders who suffered along with everyone else. The TARP recipients were the institutions that chased after unwarranted risk with huge costs to society at large. Secondly, the culture of large bonuses incentivized short-term profits at the expense of longer-term tail risks. When bankers earned large bonuses in the short-run, they knew that should their trades and investments turn sour in the long-run, the money already earned was their’s to keep. Taxes in the financial arena are a means of influencing the allocation of capital. Such a tax on bonuses would induce Wall Street institutions to seek far more efficient and beneficial long-term allocations of capital. This is EXACTLY what a transaction tax seeks to do, yet it does so in a far better way.
Lastly and perhaps most importantly, a tax on the bonuses of TARP recipients would make clear the point that government aid and bailouts do not come without some sort of cost. This would help limit the moral hazard danger created and generated by the bailout culture that started in this country far too long ago. With the precedent established during the financial crisis, banks can now operate under the premise that should trouble recur, good ole Uncle Sam will bail them out–the “heads I win, tails I don’t lose” mentality. It must be made clear that while the government will protect the system, it will not protect the actors who endangered the system. The bonuses being paid out at TARP recipients would not be around had the government not stepped in. Such a bonus tax would establish this direct connection between present vitality and the government’s emergency assistance.
We urge our representatives in Congress to consider this viable and far more effective alternative to the transaction tax and we urge our readers to shift discourse towards a windfall tax.
