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Tobin Tax Alternatives (99% vs 1%)

My favourite proposal floating around the #OccupyWallStreet/99% movement is a Tobin Tax, but they aren’t without drawbacks:

Tiny taxes on high-volume transactions raise a lot of money, but they also cost money to record, collect, and audit, which is why few jurisdictions have 0.25% sales taxes.

But the basic idea is sound: tax bad/useless things to avoid taxing good things1. That’s why books and cigarettes tend to have different tax rates, it’s also a very good argument for trading payroll taxes for pollution taxes (I’m shocked there isn’t more support for “jobs not smokestacks”).

But sticking with the 1% vs 99% framework, I can think of two alternatives:

Alternative 1: A Time Tax

Low value-add high frequency trading like ticker tape trading (or front running) rely on timely execution of trades — value investing does not. To discourage the former without affecting the latter, just randomize all trades by 1-2 seconds (the exact values would depend on the exchange).

This isn’t exactly revolutionary, it’s only recently that sub-second trading by computers in the same building as the exchange has been the standard.

Within the 1%/99% framework, the 99% buys stocks through their 401ks and mutual funds, with a timeline of days or sometimes months, it’s a very privileged class of traders who can jump in to save tiny fractions of the price in fractions of seconds.

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” – Warren Buffett

Alternative 2: An information tax

A large amount of effort goes into preventing insider trading through insider trading windows and prosecutions — all to keep the appearance of a fair game for investors. But we don’t have to keep the game fair for financial firms, how much research does the 99% do before investing in your 401k? 2

The purpose of a stock market is to let businesses raise capital and the fact that it also tends to accurately those companies is a bit of a side effect — that some people can make money trying to predict those movements is entirely a side effect. Traders with insider information help price stocks more accurately and more quickly: but instead, the SEC expends a huge amount of the effort that the SEC expends3 to ensure that all investors get their information at the same time rather than whenever it reaches them organically mostly to preserve the idea that the stock market is a game of skill, not a game of chance.

It’s complicated, maybe impossible, to enforce insider trading laws, and the rule makers aren’t entirely on board with the idea in the first place. There’s a whole whack of compliance paperwork that comes with insiders legitimately trying to sell their shares too, not for malicious reasons, but rather because you generally don’t want to have your investments tied up in the company you work for 4 All compliance costs money and insider trading rules aren’t much help to people who invest in index funds — which should describe most of the 99%.

[Edit: While we’re getting rid of SEC rules, Albert of continuations.com has a good point, let’s also remove the quiet period for going public]

  1. Assuming that spending remains constant
  2. The right answer is: pick the fund with the lowest fees, make sure you max out your employer matching.
  3. and it really is a lot of effort proportionate to the harm
  4. As incentives, stocks and stock options are usually granted on a vesting schedule as a compromise between the employee’s desire to sell them quickly and the company’s desire for employees to hold on to them forever.

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