CBO: Transaction tax could hurt U.S. financial industry

In the analysis, Doug Elmendorf, the director of the budget office, said that traders might respond to the tax by shifting their operations offshore or crafting new transactions that the tax didn’t cover.

The policy, by decreasing the number of transactions, would also make certain kinds of trading unprofitable.

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

CBO did offer the caveat that the tax’s impact would be diminished if other countries enacted a transaction levy, something that European officials like President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany have shown some interest in.

Elmendorf also said that the transaction tax would increase revenues and decrease the deficit, and declared that the policy wouldn’t really affect employment in the long run. It is also, the office said, difficult to project the economic impact of the tax beyond the next few years.

But while CBO said the tax would probably limit stock market speculation, the policy would also likely decrease all trading in the short term – “including transactions by well-informed traders and transactions that stabilize markets.”

Treasury securities would be among the financial instruments most affected by the tax, with CBO saying the decline in trading would make it more expensive for Treasury to issue debt.