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Here’s a letter that I just sent to the New York Times:
Paul Krugman supports a “Tobin tax” as a means of reducing speculation (“Taxing the Speculators [2],” Nov. 27).
Bad idea. Speculators buy assets only when they predict that these assets’ prices will rise; speculators sell assets only when they predict that these assets’ prices will fall. And speculators profit only when they predict correctly. So speculators who predict correctly help move asset prices more quickly to these assets’ ‘true’ values.
For example, a speculator who buys 10,000 shares of Microsoft believes that Microsoft’s stock is currently undervalued; the speculator’s purchase of this stock raises its price closer to what the speculator believes to be its ‘true’ value. If the speculator is correct, his speculation raises that asset’s price closer to where it should be. This ‘truer’ price – by more accurately reflecting market fundamentals – makes investment less risky for others and makes the allocation of capital more efficient.
But if the speculator is incorrect, he loses. That is, the market already ‘taxes’ harmful speculative moves while it rewards beneficial ones.
Sincerely,
Donald J. Boudreaux