Thoughts on a financial transaction tax?

[brucejoel99]

The issue with FTT's is that they penalize market-makers & arbitrageurs much more heavily than they penalize investors/speculators, because the former trade much more frequently than the latter & oftentimes make only pennies per trade. The problem is that these entities are actually much more important to the financial markets than laypeople realize. Without market-makers, it'd be much more difficult/expensive to buy & sell securities, & this reduction in liquidity would depress asset prices. Without arbitrageurs, derivatives would diverge from their "fair value" much more than they currently do, which would expose end users of derivatives like insurance companies to additional risk. In truth, these sorts of market participants probably do much more good for the economy than the big active investment funds that gather assets, collect hefty management fees, & underperform their benchmarks on average, or the private equity firms that load companies up with debt in an attempt to leverage marginal operational improvements into big returns.

That said, it's obviously true that hyperfinancialization in the American economy has led to stark inequality & has also probably led to some amount of lost productivity. To that end, I'd support an increase in the capital gains tax & a closing of the carried interest loophole. This would hit all market participants equally &, while it'd reduce net trading profits, the industry wouldn't be disincentivized out of existence.