Transaction Tax

Any policymaker contemplating a new tax should consider the potential unintended consequences.

The idea of a transaction tax is being floated now as a panacea that would both curb "hot money" speculation and raise billions to pay for bank bailouts.

You can't have it both ways.

If the tax is going to wipe big risky trades out of existence, then there certainly won't be any trades to tax.

Beyond the structural difficulty of trying to raise tax revenue on activities no longer practiced, the tax could victimize the very people it is trying to help.

A roach-motel financial structure would be created. Imagine an investor who buys into a market with every intention of becoming a long-term holder, only to be caught in an all-too-possible downturn. He would be trapped. Anyone contemplating even a long-term investment might well be dissuaded from making the initial trade, fearing the prospect of entrapment.

Should a transaction tax be implemented, the likeliest scenario is that Wall Street designers would simply invent a new, untested way to risk money.