Financial market transactions should not be taxed or restricted
During a week in which the Dow Jones Industrial and S&P 500 averages reached record highs, Congress held yet another hearing to fix “problems” in the financial markets, including the imposition of a financial transaction tax (FTT) and stricter regulations on short selling. The May 6, 2021 House Financial Services Committee hearing was the third on “market volatility,” which was also the subject of a March 9, 2021 Senate Banking, Housing, and Urban Affairs Committee hearing.
Some members of Congress claim that both the FTT and new short selling regulations would help to eliminate speculation and be a disincentive for high-risk conduct. But such an overreaction to the activity in a few stocks like GameStop would instead cause significant disruption to financial transactions and reduced returns for tens of millions of investors. And with the markets at record highs, getting the government involved in solving a problem that does not exist makes even less sense.
Following the Senate hearing, Sen. Chris Van Hollen (D-Md.) said that he and Sen. Brian Schatz (D-Hawaii) are planning to reintroduce their bill to impose a 0.1 percent FTT. He claimed this “high roller fee” would reduce risks by cutting down on high-frequency trading, reduce volatility, increase economic equality, and generate billions of dollars for “investment” by the government.
But as noted in a March 9, 2021 letter signed by 27 taxpayer groups, an FTT would be a tax on the investments of the “53 percent of American households that own stock and the 80 to 100 million Americans that have a 401(k).” It would have a particularly negative impact on public sector pensions for firefighters, police officers, and teachers. A 2021 Modern Markets Initiative study found that a typical 401(k) plan could lose $45,000 to $60,000 over the time it exists.
There is bipartisan concern over an FTT. During the House Financial Services Committee hearing, Rep. Josh Gottheimer (R-N.J.), said, “some legislators now want to impose a financial transaction tax, an FTT, on stock and bond transactions, including in my state. … according to a study by Vanguard, an FTT would cost retirement savers $36,000, more than three and half years of savings over their lifetime and would send jobs and markets overseas.”
An FTT has been proposed for many years, and it has consistently been found lacking. A Dec. 12, 2011 Congressional Budget Office (CBO) letter to then-Senate Finance Committee Ranking Member Orrin Hatch (R-Utah) said that imposing an FTT in the U.S. would raise transactions costs and decrease volume, and have a greater impact on individual investors with smaller and less frequent trades than institutional investors with larger and more frequent trades, which contradicts Sen. Van Hollen’s claim that it would be a “high roller fee.”
In Italy and France, where an FTT was enacted in 2012, less than a quarter of the expected revenue was raised. Sweden’s FTT was repealed after trading moved to London to avoid the tax, and capital gains revenue dropped due to a reduction in stock sales inside the country. An August 2019 Center for Capital Markets report cited lower revenue and reduced trades in Austria, Denmark, Germany, Japan, the Netherlands, Norway, Portugal, and Spain, all of which repealed their FTT. The center conducted a national poll in the U.S. in March 2021 that found 63 percent of respondents opposed the FTT and 51 percent said they would be less likely to invest if the tax was imposed.
The House and Senate hearings also included criticism of short selling, repeating longstanding, and inaccurate claims that it has been a leading cause of market volatility, crashes, and economic downturns. But as Doug Kass noted in a Feb. 23, 2021 TheStreet article, short selling has positive benefits, including price efficiency, liquidity, and corporate governance.
During the May 6 House committee hearing, Rep. William Timmons (R-S.C.) asked Securities and Exchange Commission Chairman Gary Gensler, “Do you believe that short sellers play a role in making fair, orderly, and efficient capital markets?” The chairman replied, “I think that short selling, which is probably as old as capital markets, several hundred years or more old, does play a role in capital markets and price formation.” He then noted that the SEC’s role is “to ensure that the markets are free of fraud and manipulation so those participants in the market, whether they are on the buy side or the short side or the long side are doing so without defrauding or manipulating the markets and there is the appropriate transparency.”
Despite the clear record of failure for the FTT and the consistent positive contribution of short selling to financial markets, members of Congress are still likely to keep pushing them forward. Investors and taxpayers should keep reminding them about the adverse financial consequences of both proposals.
Tom Schatz is president of CAGW.