China's government apparently decided that the best way to take some of the air out of its stock market is raise the stock transfer tax from 0.1 percent to 0.3 percent. With the market plunging 6 percent today, it seems like they may be getting what they want. The idea that stock transfer taxes may be effective bubble therapy is an interesting one. On the face of it, a tax of 0.3 percent on a trade is still very modest. Thirty years ago, before the developments in IT, transactions costs on the NYSE used to average close to 1.0 percent. It's difficult to believe that this had very much effect on share prices. More likely, the decision to raise the tax (like a decision to raise margin borrowing requirements) affects stock prices primarily because it sends a signal to the investors that the government wants share prices to fall and might take other steps to bring about this result. A stock transfer tax might be a very good idea in any case. Robert Pollin and I did a paper a few years back in which we calculated that a set of financial transaction taxes scaled to a 0.5 percent tax on stock trades (we have scaled taxes on assets like futures and options to avoid gaming), could raise an amount of revenue equal to 1.0 percent of GDP ($140 billion a year). This tax would be hugely progressive, primarily hitting wealthy investors and heavy traders. It would also help redistribute some of the big bucks earned by hedge fund managers. Since the tax would only raise transactions costs back to mid-eighties levels, it's hard to argue that it would cause serious damage to financial markets. While many prominent economists have endorsed such taxes (e.g. James Tobin, Joe Stiglitz, Lawrence Summers, and of course Keynes), financial transactions taxes almost never get any attention from the U.S. media. The obvious reason is that the big Wall Street folks don't like them and they will never back a political candidate who would support such taxes. In the U.S. political system, the Wall Street crew not only get a veto on what gets considered in Washington, they also get a veto over what the major media will discuss. Too bad the auto workers and the custodians don't have such power.
--Dean Baker
