The debate rages over the Tobin Tax which would place a surcharge on financial dealings. Proponents point out the fairness of such a tax on market players, insofar as the revenues would offset the rising cost of financial regulation. Opponents warn that the tax would apply friction to trading, which would reduce liquidity, suppress market volumes and, it follows, dent economic activity in any country that imposed such a measure: fool’s gold, they maintain.

Largely absent from the political discussion, unfortunately, is any real examination of the most basic issue: whether the current proliferation of trading activity benefits society through constructive capital markets, or is it a kind of make-work that employs legions of front- and back-office staff in banks and so-called “high frequency trading” firms? Are markets fulfilling their noble mission, or are they just casinos?

Every equity and derivative market participant knows that if markets only had real investors, trade volumes would be a tiny fraction of what they are. The rest of the market buzz and flickering screens is just the noise of a few hundred trading outfits exploiting infinitesimal arbitrages that enrich a few and employ an entire cottage industry that exists just for itself.

In that case, why should ordinary taxpayers underwrite the cost of regulating the nonsense? They shouldn’t, and arguments to the contrary get contorted quickly. Tax-targeting firms whose self-centered use of markets creates the regulatory burden seems eminently justifiable.

And all taxes should be proportional. But proportional to what?

Where Tobin misses the mark is that transactions are entirely the wrong metric. Generally, when transactions occur two sides know about them and they get documented internally, at least, and are often publicly reported through price feeds and markets. From a regulatory perspective, transactions form part of the record, but a part that’s easily discoverable. Why tax that?

A better basis for proportionality would include a wider sample of data produced. After all, when regulators need to investigate transgressions like market manipulation or insider dealing, they need to look at all the evidence. It has to be stored, archived, scrubbed, tagged, uploaded, downloaded and analyzed, mathematically and forensically, automatically and manually. This applies not just to completed trades, but to every bid and offer, every email, every employment record, every swipe of every ID card and every bit of surveillance video at the door to every super-cooled data center. It makes sense with some of these data, including trade orders (whether executed or not), to weight them by gross notional value in determining the appropriate levy.

In the end, all data (call it “evidence”) production would be a more fair reflection of the regulatory burden imposed by trading firms and financial intermediaries. Legislators should see this as an opportunity to establish rules, specific and comprehensive, for everything that needs to be retained, by whom, in what format, with what tags and with what means of access for regulatory scrutiny.

Of course, many such rules exist already but they’re manifestly ineffective for modern markets. If they were rewritten intelligently, finally, the audit trails behind events like the “Flash Crash” could be determined in an instant.

Moreover, compliance with these statutes would imply the creation of its own billing system: the tax man would simply press the audit button to generate an invoice. And that’s good because society needs to pay for a lot more enforcement in financial markets.