In a recent NY Times op-ed, Bob Herbert argues for a financial transactions tax to raise revenue, and curb speculation. He notes, “This would impose a small fee — ranging up to, say, 0.25 percent — on the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately”. He quotes Dean Baker (co-director, Center for Economic and Policy Research, Washington) to explain, “It raises money in a way that comes primarily at the expense of speculation …The fees would be a considerable expense for someone who is buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3. The more you trade, the more you pay … It’s a very progressive tax that discourages nonproductive activity [emphasis added]”.
In India, while we have Securities Transaction Tax (STT), it is a paltry .125% and deductible as a business expense; short term capital gain tax is only 15% (up from 10% last year). Both of these do little to curb speculation (India has one of the highest trading volume to total market cap). However, this is an economic policy point and somewhat tangential. The more central point is that shouldn’t we as a society worry about the the colossal waste (and warped incentives) of bright minds in India, lured by the easy money and the pseudo-intelligence of speculation, be it in real estate or trading puts and calls in the stock market. How can we justify making money on the stock market simply based on hunches/knowledge of which way a stock/market will go in a certain period. That’s not the underlying tenet of the stock market – of fueling investment in companies that produce valuable goods and services in the economy. Nowhere in the world are the short-term gyrations of the stock market based on any rational understanding of the fundamentals. Yet, we idolize, envy, and emulate the traders who make a ton of money through speculation. Paul Krugman (’08 Economics Nobel) notes “There’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing”.
Personally, I feel that a preponderance of those who acquire such off-the-graph gains are either lucky (riding the wave) and/or unethical (active collusion). And we shouldn’t encourage or glorify those who make personal gains at the society’s expense.