Don’t mess with taxes
According to The Dallas Morning News, [Texas governor Greg] Abbott’s office has been talking with Nasdaq and other exchanges about moving their data centers to Dallas because of a potential tax on financial transactions in New Jersey.
The proposed tax would charge a quarter of a cent per “financial transaction” at entities in New Jersey that process at least 10,000 transactions annually via electronic infrastructure, the Dallas Morning News reported. That tax would generate an estimated $10 billion annually for the state.
Most major stock exchange operators, including the New York Stock Exchange operate their trading platforms from data centers in New Jersey.
This is from “Wall Street moving to big D? Nasdaq, other stock exchanges consider relocating to Texas,” ksat.com, November 10, 2020.
One of the dumbest things to tax, whether your goal is raising revenue or minimizing deadweight loss, is goods or services whose elasticity of supply or demand is high. The reason is that in response to those taxes, the equilibrium amount that’s left to be taxed falls substantially.
The Tobin tax, named after Yale University economist and Nobel Prize winner James Tobin, is a small tax on conversions of one currency into another. But since his proposal in 1972 in, coincidentally, New Jersey, others have extended the idea to taxing transactions in the stock market. The New Jersey tax above is not literally a Tobin tax but is a tax on transactions in the stock market.
One of the easiest things to do, when your service is sold electronically, is to move to a place where you can still do it electronically but where it is untaxed.
Thus Texas.
READER COMMENTS
Alan Goldhammer
Nov 11 2020 at 1:15pm
What guarantee is there that Texas won’t tax such transactions at some point in time?
robc
Nov 11 2020 at 1:50pm
None. But if moving is cheap and easy, then you do it again. Eventually you might run out of places to move to.
David Henderson
Nov 11 2020 at 2:17pm
None. I’m guessing that that’s what they’re meeting the governor about.
David Seltzer
Nov 12 2020 at 6:20pm
Alan, I was a market maker on the CBOE from 1977 to 1979. The early days of the CBOE. During that span, the Illinois State Assembly talked about a transfer tax on all derivatives transactions. Interestingly, the City of Dallas offered the CBOE a venue and no transfer tax assessment. If economics is about incentives, the transfer tax talk from Illinois soon quieted. I suspect moving to Dallas, renamed the DBOE, the floor officials and CBOE execs would have asked for an assurance no transfer taxes would be applied later.
Chris H
Nov 11 2020 at 6:21pm
For some trading, isn’t there an advantage to being physically close to the trade, because the actual propagation time — speed of electricity and router hops — makes a difference? If that’s the case, Texas is a lot of router hops away.
Now, fiber optic cable to New Hampshire…
Dylan
Nov 11 2020 at 6:44pm
That was my thought too, but then I realized they were talking about the exchanges themselves, and not the HFTs that have moved themselves as close as possible to the exchanges to benefit from the timing advantage.
Of course, i also thought these transaction taxes were targeted at HFTs and not the exchanges so, apparently, I haven’t been paying very close attention.
Matthias
Nov 11 2020 at 8:42pm
The exchanges naturally have an interest of doing good by their customers and business partners.
Alan Goldhammer
Nov 11 2020 at 8:42pm
Michael Lewis wrote all about this in ‘Flash Boys.’
john hare
Nov 12 2020 at 4:43am
Some years ago there was a frequent guest on a radio show advocating a transaction tax on every transaction on Wall Street. His argument was that the actual GNP of the US was several quadrillion dollars a year because that was the quantity traded. So a 1% (as I remember) transaction tax would pay off the national debt in the first year and eliminate the need for any other taxes etc.
Wasn’t interested in hearing about there not being that much actual money involved or that the traders would either stop trading or go broke in short order. “You shouldn’t feel sorry for the traders” was one of the retorts to my call in.
David Henderson
Nov 12 2020 at 11:34am
Wow! And of course, what would have happened with those numbers is that in the short run there would be little trading and in the long run, trading would move to a place like Qatar.
David Seltzer
Nov 12 2020 at 6:30pm
Yup. When I managed a hedge fund in the late 1980’s, there was always a discussion about moving off shore if the cost of trading increased marginally. Our concern with regulations and new taxes was the erosion of risk adjusted returns.
Thomas Hutcheson
Nov 12 2020 at 7:37am
Does the application of this insight about taxes having incentive effects imply that a tax on net CO2 emissions would be optimal?
robc
Nov 12 2020 at 10:57am
No, because it isn’t. A carbon tax has deadweight loss, optimal taxes dont.
Jon Murphy
Nov 12 2020 at 1:44pm
Optimal taxes (at least some of them) do have deadweight loss associated with them. But the idea is that the welfare gains exceed the deadweight loss.
David Henderson
Nov 12 2020 at 11:33am
You wrote:
No. It implies only that it could be optimal.
Jon Murphy
Nov 12 2020 at 2:17pm
To David’s point, as Ronald Coase showed in his famous 1960 paper The Problem of Social Costs, there is no prima facie reason to think that taxes on externalities are optimal or optimizing. Indeed, as he shows, they may very well be harmful!
Thomas Hutcheson
Nov 13 2020 at 6:30am
So it comes down to an estimate of the costs and benefits of the tax? The discounted PV od the harm avoided and the deadweight loss?
Jon Murphy
Nov 13 2020 at 9:36am
No. That’s still putting the cart before the horse.
Comments are closed.