Systematic Relative Strength

Transaction taxes are being discussed by some politicians and academics as a way to raise revenue and “make Wall Street contribute its fair share.” Index Universe has an article discussing actual historical experience with a trading tax and then follows through with the math to show that the amount of potential revenue is clearly overstated by several magnitudes. The good thing about history is that you can actually learn from the experiences of others.

The best-known example comes from Europe-or Sweden, to be exact-which probably explains why the European proposal has met with such strong opposition. From 1984 to 1991, Sweden implemented a series of taxes ranging from 0.5% on equities to fractional basis points on certain bond trades.

The results were disastrous. As any sane person might expect, trading volumes plummeted in Sweden as investors moved their money to more lubricated markets. Within six years, the options market vanished entirely, futures volumes fell 98 percent, and 50 percent of equity trading moved offshore. Even bonds, which had fractional basis-point taxes, suffered an 85 percent reduction in trading volume.

The article proceeds to calculate that if volumes stayed unchanged, taxes would amount to another 10% of GDP! That’s about 50% of the current entire tax base. As the Swedish example makes clear, volumes won’t be unchanged. Nor does it seem like a good idea to cripple the economy with a potentially enormous tax increase. In Sweden, the revenues turned out to be modest, but the damage to the Swedish financial system was severe.

Perhaps we will learn from history, or perhaps we will simply prove Hegel’s theory: The only thing we learn from history is that we learn nothing from history.