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If you look at this list of the 20 biggest donors of the 2012 election, and you scroll down to number 20, you’ll find out stuff about Robert Mercer:

Robert Mercer is co-CEO of the $15 billion hedge fund company Renaissance Technologies. In 2009, according to the New York Daily News, he accused a builder of overcharging him $2 million for a construction project in his mansion—a “museum-quality” model train display “about half the size of a basketball court.” During the 2010 midterms, Mercer was outed as the funder behind $300,000 worth of attack ads targeting Rep. Peter DeFazio (D-Ore.). In the 2012 election cycle, he and his wife Diana have given $150,000 to the Republican National Lawyers Association and $100,000 to the free-market super-PAC Club for Growth Action.
Total giving for 2012 race: $384,100
• Giving to outside-spending groups: $260,000
• Giving to candidates and parties: $124,100

First, if I’m the model train set guy from above, I overcharge Mercer $2M and hope that he’s too embarrassed to sue me. And I am wrong.

Second, let’s look a bit more into the attack ads against DeFazio. Why is he spending so much time to work against this guy? Oh maybe this explains it. DeFazio was trying to impose a small transaction tax to curb high frequency trading, and Renaissance Technology, where Mercer works, makes their money through high frequency trading on the futures exchanges:

Capitol Hill Democrats introduced legislation today that would impose a tax on financial transactions in order to curb high-frequency trading and force Wall Street to contribute a bigger share to the federal budget.

A measure written by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., would place a 0.03% levy on financial trading in stocks and bonds at their market value. It also would cover derivative contracts, options, puts, forward contracts and swaps at their purchase price.

So this is how politics works. As Sarkozy mentioned in this Bloomberg article where he was discussing imposing a similar transaction tax in France:

“If France waits for others to tax finance, then finance will never be taxed,” Sarkozy said today in a speech in the eastern French city of Mulhouse.

It seems like the Harkin/DeFazio transaction tax bill is still alive, for now. What’s so worrisome about it? To find out I registered to read this article from Investment News (registration is free), which starts out quite nicely:

Hark: Beware of Harkin tax plan

Investors, beware of the financial transactions tax proposed by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore. The tax may appear to have no chance of adoption at present, with the Republicans in control of the House and in position to block many proposals in the Senate, but the situation could change after the 2012 elections.

If Barack Obama retains the presidency and the Democrats regain control of both houses of Congress, we could see a tax on securities trades, especially if the passions evidenced by the Occupy Wall Street demonstrations remain high.

Woohoo! I love it when people are afraid of Occupy Wall Street, especially when they think they are only talking to their insider friends. After explaining the scope of the tax (again, 3 cents on 100 dollars), the article goes on:

In a breathtaking display of economic ignorance, Mr. Harkin declared: “This measure is not likely to impact the decision to engage in productive economic activity. There’s no question that Wall Street can easily bear this modest tax.”

Does Mr. Harkin not realize that customers, not Wall Street, would pay the tax? As opponents of the proposal argue, the proposed levy — effectively, a sales tax — would increase the cost of investing and be passed on to the ultimate customer, not absorbed by the brokerage firms, hedge funds and other professional traders at whom it is nominally aimed.

In effect, it also is a tax on liquidity. As anyone who has studied economics knows, when you tax something, you get less of it, so the result would be less liquid markets and more-costly transactions.

The article then goes on to warn that such a tax would move business offshore:

Finally, a transactions tax might drive trading and investing offshore to financial centers, such as Singapore or Dubai, that don’t impose such taxes. Academic research suggests that after the imposition of a transactions tax, market volatility would rise, while trading volume —and with it, liquidity — declined.

Just in case you’re not sufficiently worried yet, the article makes some further scary suggestions, which bizarrely allows for the fact that the current plan is benign:

Other dangers regarding the transactions tax proposal are that the low initial tax rate, 0.03%, might be absorbed by investors without too much pain, leading it to be raised quickly to a more burdensome and damaging rate.

That is what happened with the income tax in the U.S., and, more recently, with the value-added tax throughout Europe.

Another danger is that a transactions tax could be extended quickly to other financial transactions, including credit and debit card transactions, checks and bill payments. These likely would be even more damaging to economic activity.

The financial services industry should continue to resist the financial transactions tax, even at the proposed low rate. Once the camel’s nose is in the tent, the whole camel soon follows.

I asked a quant friend of mine what he thought of this article, and he said the following:

I’m personally not a huge fan of transaction taxes because I guess I feel trades should be encouraged (people should, for example, be able to have an S&P500 account instead of a checking account, where you sell units of S&P each time you buy some milk) and in general tight spreads means more actionable information (in the sense of knowing whether a bank is solvent for example, or allocating resources to build a new power plant). In addition, they are often avoided at some additional cost to investors. In the UK, they have a stamp tax on equities, and as a result only a few people trade equities, and almost all funds trade “swaps” with some additional arb/copmlexity added to the system as a result.

That said, the doomsaying in the article is definitely overboard. It would certainly wipe out a lot of HF trading, which is of limited value to society (I think HF does make for better pricing, but the resources put into it might not match the societal benefit of the slightly more accurate prices).

This would cause some trading to go offshore. In the UK for example, various regulations were (a small) part of the reason ManU decided to list in Singapore. The loss in capital gain taxes are from a bunch of sources, but one of the major ones is sure to be deferred sales, meaning the taxes would just be paid later.

It does make some sort of intuitive sense to match the costs associated with overseeing transactions paid for by the transactions though. If you feel that financial transactions are burdensome and need more regulation, the people who are causing that burden should pay. Whether that should be via a transaction tax or by a profit tax or by an exchange/regulatory fee, I don’t know.

(You know my bias, that it’s really the hidden transactions that are the main issue, and so I think if anything you should be taking financial intermediaries for having illiquid/non-tradable assets on their books rather than encouraging them to have more of it).

I’m left kind of rooting for the transaction tax, personally, and it’s not just because I want to see Mercer miserable; it can be seen as a tax that most people will not notice but people who make enormous number of bets will be affected by. On the one hand, this means it’s a truly progressive tax, and on the other hand, it means you will actually need to think a trade is worthwhile before making it.