Democratic presidential candidate Hillary Clinton is proposing new taxes on large-volume trading in financial markets, one of several measures designed to appeal to the party’s liberal nominating base as she squares off against insurgent rival Sen. Bernie Sanders (D-Vermont). The challenger’s left-wing economic populism has won him traction in some early nominating states, putting pressure on Clinton to maneuver her campaign to guard against a repeat of 2008, when a relatively unknown Barack Obama swept the party off its feet with an appeal to passion and principle.
Hillary Clinton on the campaign trail. (www.hillaryclinton.com).
Clinton’s strength is seen as her experience and pragmatism, although clearly the campaign is focused on the nomination, and not the inevitable pivot to the center (rhetorically, at least) that marks most presidential bids as they begin to look towards the general election.
I hope to dissect some of her proposals in greater detail in the coming days. The tax on so-called high-frequency trading, is actually a tax on order cancellations in financial markets. This is designed to penalize large-volume, computer-driven trading strategies, which Clinton and some other critics blame at least in part for market meltdowns and flash crashes; it is also designed to discourage “spoofing,” a technique that can involve submitting open orders in an effort to push the market one way or the other, and later canceling them.
Debate will no doubt ensue as to whether imposing new taxes on market trading is likely to achieve the “fairness” and stability proponents claim to desire. These new costs would however, very likely do two things:
- Reduce market liquidity, by making it more expensive to trade. Lower liquidity means higher spreads (the difference between bid and ask), which also makes transactions more costly. These direct and indirect costs will hurt both institutional and individual investors.
- Increase the cost of risk management. Small and large traders alike often rely on series of continually adjusted stop orders to protect profits and cut losses. These systems can rely on orders that are placed and later canceled and replaced with a new order to reflect market movement. Taxing order cancelations will make it more expensive to manage risk in this way, thereby potentially injecting even more risk into capital markets.
Politico and others have reported that former Secretary of State Clinton is relying on former Rep. Barney Frank (D-Massachusetts) and Gary Gentler (who helped craft Dodd-Frank) to advise her on economic matters.
Charles Krauthammer advocates real compromise when it comes to avoiding the fiscal cliff, saying Republicans should concede to tax increases only as accompanied by cuts to discretionary and entitlement spending along with tax code reform. In his weekly Washington Post column, Krauthammer writes that Speaker Boehner and his House Republican majority shouldn’t deal as if they come to the table without a card to play. They’ll take a hit, but President Obama will suffer lasting damage to his legacy if the American economy gets hit with across-the-board tax hikes in January.
There’s been a scuffle within the GOP family about the best way to proceed here. The reality is that we have a massive and growing national debt that must be addressed. The fiscal cliff does just that – but so suddenly and substantially that it seems untenable. The better way is with a deal that steadily reduces debt but also promotes prosperity and growth.
Real cuts to discretionary spending is probably the easiest place to start politically, and the need for them should be self-evident. Some of the fiscal cliff cuts are actually a decent place to start, but a new deal could contain a smaller package of cuts and one that no longer requires the military to take on the largest proportional share of spending reductions.
Entitlement reform will be incredibly difficult to agree (especially in such a short period of time) but really it must be included – even if it is a modest, incremental change, such as the gradual raising of the age of social security eligibility, say, by one or two years over the next decade. Something that will at least begin to change the liability curve over time and prevent these programs from not only consuming an ever-greater share of the budget annually but eventually drowning us in red ink entirely. We have got to start somewhere.
In exchange for these cuts, Republicans should go along with the removal of certain exemptions from the tax code. Everything should be looked at. All things being equal, you avoid popular programs like the home mortgage interest deduction to the degree possible. You also bring to the table cuts to corporate welfare; most obviously cases like Solyndra, where economically dubious pet projects are being promoted, but handouts for other business interests as well. Scaling back exemptions and subsidies not only relieves deficits but also flattens the tax code, which should be a perennial goal for the Republican Party.
All of that is easier said than done of course, but it could be a good road map for the next month as lawmakers try to avoid walking us off this cliff we have created for ourselves.