Let’s Talk Turkey; A Financial Transaction Tax?*

Let’s Talk Turkey

The country, not the bird.

Change happens. In Turkey, change has been a slow-motion slide into dictatorship.

Turkey used to be the shining example of an Islamic republic with a multi-decade history of secular democracy. No more. Turkey’s last sixteen years provide would-be dictators with a manual on how to turn a progressive country into a corrupt, absolutist state. It’s a sobering lesson. Few would have predicted that Turkey’s slide would begin with President Recep Tayyip Erdogan’s election as Prime Minister in 2003.

Erdogan consolidated his power slowly, relying largely on nationalist and Islamist rhetoric to target and purge opponents, first government employees, then academics, members of the press, and finally the military (after a failed coup attempt in 2016). In the process of eliminating those within government who were not certified supporters, deriding possible rivals, and muzzling free speech, Erdogan installed members of his family and cronies in positions of power and authority. He focused on potential dissidents, labeling many “terrorists.” He burnished his strongman image by waging war on Kurdish militants, members of a social and religious group that had been criticizing his tactics (the Gulen Movement), and anyone who questioned his leadership. His successes in doing so enabled him to mobilize his core constituency to amend the constitution and shift the form of government from a parliamentary democracy to one where power is concentrated in the executive. That led to his election as President.

However, like many would-be dictators, Erdogan has shown little skill in managing the economy.

Between 2002 and 2007 Turkey’s economy expanded at almost 7{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} a year. It’s annual average growth since then has been less than 4{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}, significantly below what would be expected of an emerging market country located at the world’s economic and strategic cross-roads, a NATO member, and a nation blessed with abundant resources. Average inflation since 2007 has been consistently above target and Turkey’s currency has been exceptionally volatile, dropping in value precipitously since the last Presidential election in June 2018. March saw foreign currency reserves reach a new low as Turkey’s Central Bank tried to prop up a weakening Lira and prevent banks from making loans to foreigners who were shorting the currency. The Lira stabilized in advance of local elections held yesterday, March 31st. Nevertheless, efforts by the government and the Central Bank have not reduced a 20{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} inflation rate or an 11{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} unemployment rate. Turkey is mired in recession.

The March 31st results became a plebiscite on Turkey’s economy. In his campaign speeches, Erdogan staked out a variety of crazy harebrained unbelievable unorthodox economic positions. Among other things, he asserted that Turkey’s inflation has been caused by higher, not lower, interest rates. Of course, the opposite is true. Turkey’s too-low interest rate policy increased Turkey’s inflation rate and led to capital flight. Erdogan nevertheless ridiculously predicted that “[w]hen interest comes down, inflation will come down,” bragging that “I am also an economist.” Using the tried and true tactics of demagoguery, Erdogan blamed Turkey’s economic difficulties, the volatility of the Turkish Lira and the poor performance of its stock market, on enemies. “All of this is an operation to put pressure on Turkey by the west, especially America,” this ally of America and member of NATO said.

Erdogan’s playbook has been a success. He’s applied a formula to consolidate power that has been effective in other countries as well. Turkey is not unique. The fact that it was a strong secular democracy with robust democratic institutions, an independent judiciary, and an independent military should be a wake-up call. It can happen anywhere. Democratic institutions can whither over time in the face of populist nationalism. Scapegoating, targeting an “enemies list,” and undermining judicial and media watchdogs are all symptoms of power-hunger that can result in a slippery slide into absolutism. What once might have been considered merely heretical eccentric unconventional policy-making isn’t necessarily benign. The pursuit of power corrupts, and that corruption has been inundating flooding seeping into a good many democratic countries and their institutions. Even though many of his party’s candidates were defeated in yesterday’s elections, Erdogan undoubtedly will do whatever it takes to stay in power. And he can … because over the past sixteen years he has patiently eroded those institutions and individuals who could check that power.

There are lessons here.

A Financial Transaction Tax?

The U.S. has a massive budget deficit and Democrats are keen to reduce it by taxing the rich. AOC is advocating a marginal Federal income tax rate of 70{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. Elizabeth Warren would impose a wealth tax of 2-3{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. Bernie Sanders would tax estates of Americans with a net worth of more than $3.5 million. And Senator Brian Schatz would impose a 0.1{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} tax on financial transactions.

Each of these proposals would raise revenue. The question is whether the revenue raised would offset the burdens imposed … as well as what the unintended consequences might be. In the words of Jean-Baptiste, the Minister of Finances under Louis XIV, “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest possible amount of hissing.”

To many, the financial transaction tax seems most reasonable. It is the least intrusive of the current Democratic tax proposals and, at only 0.1{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}, superficially would have only a small impact. Senator Schatz estimates that the tax could raise nearly $800 million over a decade. Since its impact would fall primarily on the rich (because they own the substantial majority of financial instruments), it has found a relatively broad base of support.

Not so fast.

The goal of tax legislation should be to raise revenue without intruding into the efficient operation of the economy. Unfortunately, the proposed financial transaction tax appears to be almost solely about social engineering, which should not be the purpose of any tax.

Senator Schatz has said that one goal of the proposed tax is to reduce “speculative behavior,” a terribly incongruous concept. The very purpose of a properly functioning market is to promote speculation. Markets provide a price-discovery mechanism and a means to liquidity that together are intended to promote an efficiently functioning marketplace. Any government intrusion into that mechanism is akin to throwing sand into a gearbox. If the state substitutes its judgment for the judgments of private investors, markets change … and almost always for the worse. The only justification for such change would be to protect investors from predatory practices.

Addressing perceived predation is Senator Schatz’s hidden agenda. “[What] we’re trying to do here is get high-frequency trading under control, and it is currently out of control…. High-frequency trading is a real risk to the system, and it screws regular people; that’s the main reason to do this…. If in the process of solving that problem we happen to generate revenue for public services, that’s an important benefit, but that’s not the main reason to pass this into law.”

Although it’s entirely reasonable for government to legislate against market abuses, the alleged abusive behavior must have a demonstrably adverse impact on the markets … and there must not be a countervailing benefit. That’s a difficult case to make with respect to high frequency trading.

One goal of an efficiently-functioning market is to encourage participants to innovate. America and America’s markets have led the world precisely because they have been the most innovative. Faster and more advanced computer hardware and software is the very definition of innovation … and of high frequency trading. The government therefore should not be eager to penalize high frequency trading without clear evidence that it corrupts the operating efficiency of the markets.

U.S. markets have been world-beaters for more than seven decades, but that’s not a law of nature. Markets compete with each other for investors and, at the moment, New York and Chicago are at the forefront of global competition. This has had hugely beneficial knock-on effects for America as a whole. However, China, among others, is intent on unseating American market hegemony (as well as American financing and American innovation). China and other national competitors will adapt to any changes America makes to its markets. They will make every effort to capitalize on those changes. It would be well for America to make only those changes that enhance, and not damage, its competitiveness.

Traditional ways of raising tax and addressing social issues do not work well in a globalized world. America already has the most complex tax system in the world. Further taxation can only add burdens and complexities. If high frequency trading is abusive, it should be legislated or regulated away.

Finally (from a good friend)

Note left for teenage son/daughter:

Load and unload the dishwasher.

Then take a picture of it.

Then walk the dog and take a picture of it.

Then send me both pictures and I’ll tell you where the power cord is for your Xbox.

Thank you.



*┬® Copyright 2019 by William Natbony. All rights reserved.

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