December 13th, 2011
Econintersect: The Congressional Budget Office (CBO), responding to various questions posed by Sen. Orrin Hatch, stated:
The tax would raise the cost of financial transactions. Securities that are traded frequently, such as Treasury securities, would be more affected than securities that are traded less frequently. The tax would also decrease the volume of transactions and would make some types of trading activity—such as derivatives transactions to manage risk and computer-assisted high-frequency trading—unprofitable. In cases where the tax was high relative to current transaction costs for a security or derivative, the volume of trading would drop more than in cases where the tax was low relative to current transaction costs.
Beginning on January 1, 2013, H.R. 3313 and S. 1787 would impose a tax on most purchases of securities and transactions involving derivatives. For a transaction involving a stock, bond, or other debt obligation, the tax would be 0.03 percent of the value of the security. For a transaction involving a derivative, the tax would be 0.03 percent of any payment made under the terms of the derivative contract, including the price paid for the contract when it was written, any periodic payments, and any amount paid when the contract expired. The tax would not apply to the initial issuance of stock or debt securities, to trading in debt instruments that have fixed maturities of no more than 100 days, or to currency transactions (although transactions involving currency derivatives would be subject to the tax). The tax would be imposed on trading within the United States and on transactions outside the country if any party to the transaction is a U.S. corporation, partnership, or individual.
The CBO noted that it was not clear what would be the overall impact to the USA economy.
- ......... most likely be an increase in financing costs, because the economy is weak, interest rates are already extraordinarily low, and the introduction of the tax might not appreciably change investors’ expectations about future deficits.
- ....... the tax’s overall impact on output would depend on whether the tax increased or decreased cumulative investment, either of which is possible.
- ......... Empirical evidence provides little indication that a transaction tax would reduce volatility. In fact, a number of research studies have concluded that higher transaction costs are associated with more, not less, volatility
- The tax would also affect GDP by reducing the number of financial transactions and the total resources used to conduct those transactions ........ Whether that reallocation of resources would lead to higher or lower GDP in the United States would depend on whether the new uses for the resources were more or less productive than the uses that would occur under current law, as well as on the degree to which trading moved abroad.
- ....... municipalities would probably face slightly higher costs to finance their activities. However, because the transaction tax would be small and would apply uniformly to all types of debt obligations, it would probably not disproportionately affect municipal governments’ access to finance.
- ...... Imposing a transaction tax would probably have a large impact on the frequency of trading in Treasury securities—especially for recent issues, which are traded the most often and have the lowest transaction costs. In 2011, approximately 5 percent of the outstanding stock of Treasury securities was traded among market participants each day ...... As a result, the volume of trading in Treasury securities would be expected to decline significantly, reducing the ability of buyers and sellers to execute transactions at high frequency or in large volumes (a measure of the market’s depth). Even after accounting for any reduction in borrowing costs from reducing budget deficits, the cost to the Treasury of issuing federal debt would probably increase in the short term because investors would pay less for Treasury securities that were less liquid. Over the longer term, whether that cost would be higher or lower than would otherwise be the case is unclear.