CBO Deals (Slight) Blow to Financial Transaction Tax

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Although the banks and Republicans are cheering the non-partisan Congressional Budget Office study of the financial transaction tax, it doesn't really seem to do much to bolster their case.

The analysis released last night comes in a form of a letter to Senator Orin Hatch, who had asked the CBO to analyze a new tax on financial transactions proposed by Senator Tom Harkin, a Democrat from Iowa, and Congressman Peter DeFazio, a Democrat from Oregon.

The letter warns that if the US were to adopt a financial transaction tax, many transactions might move overseas.

"Because of economies of scale in trading markets, as foreign holders of U.S. securities moved their transactions abroad, more of the market could go with them, which could diminish the importance of the United States as a major global financial market," writes CBO director Douglas Elmendorf.

But it also notes that this effect would be diminished if other countries also imposed a transaction tax. And, as it turns out, Europe is considering a much higher financial transaction tax. So trades might actually migrate toward the US, since we'd be relatively tax-advantaged.

The letter also notes that the tax could make high frequency trading too costly to conduct. But reducing high frequency trading is one of the goals of the tax, so this is hardly a strike against it. It means that the tax would raise far less revenue than proponents hope, but I'm sure they're willing to accept that result.

I'm an opponent of the financial transaction tax, simply because I don't think we need any new taxes right now. In fact I think we're far overtaxed. But this CBO letter seems to be much less of a blow to the tax than headlines might lead you to believe.

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