Arsip Blog

Tax Regulation Sh*t

Okay. So i’m not going to bitch the government here, or any of their tax regulation. This discussion just will go about the financial market area, focusing in what tax regulation would affect the economy through that sector.

So far, we believe that regulation such as taxes, especially ones that directed to financial transactions would lead the economic growth to decline. Things aren’t much different with if it happens to bank’s financial transactions. Baker and Jorgensen (2012) found the opposite. Their main point is that the raise of the financial transactions costs—through tax regulation by the government—doesn’t always have negative impacts on economic growth. In truth, it can even raise the real growth, though rather slowly, by focusing more to the asset-backed investment, as in “real” form of investment. Well, fundamentally there are four reasons which base Baker and Jorgensen’s (2012) arguments.

First off, things like free riders (or, according to Baker and Jorgensen’s choice of words, noise-traders) and highly informed traders. The raise of the transaction costs can kick out both factors from the game. Money would go to normal investors, they who don’t ride the financial market transactions only to get hands on margin and not dividend, or pay some insider to get crucial information which would put other in disadvantage. The second reason is the real impact of higher transaction costs on the cost of capital (firms or banks tend to lower their capitals if the cost is higher, or so we thought). All this time, we have this perception that higher transaction costs would affect the capital and eventually, the investment moves. But Baker and Jorgensen (2012) found that the case may not be so true.

Truth is, there are quite many firms (or banks) which use most of its retained earnings to enhance their investment moves, not solely by raising their capital. If we recall back to the determinants of investments in order to raise the economic growth, we would find that the cost of capital actually has very small effect in investments. The third reason is that the resources freed up by reducing the volume of trading may actually mean that more resources are available for investment. The main idea is that financial market tends to have unnecessary use of resources, or things can get out of line. Investors used to ignore resources as the main form of investment.

And the last reason would be productive public investment. Where the revenue from the tax will go afterwards? If the destinations are things such as infrastructure, research and development, and education spending, then all will be well. In other words, the revenue would go productive. But if not, then good luck with the tax regulation plans. We may as well just choose between go down in flames or go up in smoke with such case.

But if we’re talking about bank side of view, would it affect bank’s expansion plan in general? Or in broader idea, would it affect banking’s expansion in a country? The answer of that will be found in the next post . . . LOL