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Casey B. Mulligan: Sticking to His Guns   How Krugman Stacks Up
Oct 9 2008 8:19PM EDT

Harvard's Frankel Likes Taxing Trades

Apologies but, just catching up to this one. I criticized Jesse Eisinger's proposal for taxing trades and the notion that such a levy would improve markets by reducing short-termism.

But now (or rather, as of Sep 30) Jesse has the backing of a heavy-weight economist: Harvard's Jeff Frankel.

Frankel does also conclude as I did that taxing trades won't improve market functioning, however, he argues that a trade tax would've made TARP more palatable:

The general historical experience seems to be that there is no discernible effect on volatility (though a couple of studies find effects on volatility, either upward  or downward).   In other words, the tax might not help the functioning of the financial markets -- the original motivation - but neither does it hurt, according to a majority of the studies.  In some cases the volume of trading within the country is affected.  But what the tax does does usually do is raise money for the Treasury.
Of course we didn't need the tax to get TARP passed, but the next time the government comes back to Congress for more bailout dough, this proposition might speed up the approval process.
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