Tobin Taxes and Elasticity
By David Henderson
Don’t mess with taxes
According to The Dallas Morning News, [Texas governor Greg] Abbott’s office has been talking with Nasdaq and other exchanges about moving their data centers to Dallas because of a potential tax on financial transactions in New Jersey.
The proposed tax would charge a quarter of a cent per “financial transaction” at entities in New Jersey that process at least 10,000 transactions annually via electronic infrastructure, the Dallas Morning News reported. That tax would generate an estimated $10 billion annually for the state.
Most major stock exchange operators, including the New York Stock Exchange operate their trading platforms from data centers in New Jersey.
This is from “Wall Street moving to big D? Nasdaq, other stock exchanges consider relocating to Texas,” ksat.com, November 10, 2020.
One of the dumbest things to tax, whether your goal is raising revenue or minimizing deadweight loss, is goods or services whose elasticity of supply or demand is high. The reason is that in response to those taxes, the equilibrium amount that’s left to be taxed falls substantially.
The Tobin tax, named after Yale University economist and Nobel Prize winner James Tobin, is a small tax on conversions of one currency into another. But since his proposal in 1972 in, coincidentally, New Jersey, others have extended the idea to taxing transactions in the stock market. The New Jersey tax above is not literally a Tobin tax but is a tax on transactions in the stock market.
One of the easiest things to do, when your service is sold electronically, is to move to a place where you can still do it electronically but where it is untaxed.