Four Reasons Why ‘High Roller Tax’ On Stock Trading Hurts The Economy

Congressional Democrats’ newly-unveiled economic proposals, likely to reverberate into the 2106 presidential race, continue the drumbeat of class warfare and economic contraction. However well-intentioned, their plan to increase taxes on stock trading would stifle growth and incentivize investors to move their capital overseas.

While billing themselves as “progressive,” their plan conjures a twist on President Obama’s 2012 foreign policy insult: “The 1980s are calling, and they want their market inefficiencies and liquidity reduction back.”

As professors Charles Jones of Columbia Business School and Erik Sirri of Babson College point out in research for the U.S. Chamber of Commerce, “Twenty years ago, buying a few hundred shares of stock would have taken several minutes and could have easily cost over $100. Today, this trade can happen in seconds with the click of a mouse and is likely to cost less than $10.” Democrats want to change all that, to the detriment of the American economy in four major areas:

1) Higher taxes constrict the flow of capital, hurting job creation. Tax hikes are either passed to customers through new fees or in the stock price of the firm. As it becomes pricier to trade firm shares, that typically causes the stock price to plummet to compensate compensate investors for the higher trading costs.

As Jones and Sirri state: “With a lower stock price, the firm is less able to raise capital and may opt not to take on profitable projects with insufficiently high rates of return. This comes back full circle in the form of lower economic growth and fewer new jobs.”

2) Despite Democratic rhetoric, markets are efficient. Jones and Sirri also point out that since the early 1970s, technology, competition, and better regulation shrunk trading costs to a tiny fraction of their earlier levels. Banks and other financial institutions have been shaving off staff due to automation and the rise of exchange-traded-funds, which reduce the likelihood of human error and are considerably cheaper. More taxes could also lead to more layoffs in this sector. So while the left would have you think Wall Street is brimming with Fat Cats, those cats are actually much leaner these days.

3) America would lose its competitive edge. Rep. Chris Van Hollen of Maryland, a senior Democrat, has been on the frontlines of reviving this ill-conceived push for fee hikes. Van Hollen’s Orwellian-speak calls for “a tiny fee,” as opposed what he calls the current “infinitesimal fee” on stock transactions that funds the Securities and Exchange Commission. His justification? Everybody else is doing it, too.

Van Hollen: “American financiers and high rollers have claimed that financial trading would migrate to other countries if the U.S. imposes a financial market trading fee – but as the EU nations join the many other countries with financial centers that have trading fees, there is no reason why the United States should not also move forward in concert with others.”

It’s true that American stock market transactions have generally been lower than their peers. But Van Hollen wants a race to the bottom in terms of outcomes for savers and investors. He also cites projections for European Union tax revenues seemingly without recognizing that regulation does not occur in a vacuum and would likely lead to far lower tax revenues through capital flight on either side of the pond.

“The United States has not been alone with this experience,” Tom Quaadman, vice president of the Chamber’s Center for Capital Markets Competitiveness told me. “Sweden imposed a financial transaction tax in the 1980’s. After it was imposed, stock transactions moved overseas and didn’t return after the tax had been removed.”

frenchieSource: Charles M. Jones and Erik R. Sirri, Examining the Main Street Benefits of our Modern Financial Markets

4) Retirees and the middle class would be harmed by the plan. Workers saving for retirement in 401(k) plans typically participate in the stock market indirectly via mutual funds. Trades by 401(k) mutual fund managers would be hit by this plan, taxing 401(k) enrollees.

“The Van Hollen proposal should be dubbed the 401(K) tax because it will raise costs and erode the return for investors who use mutual funds or workers who use pension funds,” Quaadman said.“Shortly after President Hoover pushed through a dramatic increase in the financial transaction tax as a means to stop financial speculation, the stock market reached the depths of the Great Depression. Presidents Kennedy and Johnson, to address underperforming capital markets proposed and repealed the financial transaction tax, opening up the stock market to many middle class investors for the first time.”

Rather than expanding access to markets by making transactions more affordable for the middle-class, Democrats want to push stock prices further out of reach.

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In an era where Obamanomics has led to sluggish growth and an ever-expanding entitlement state, a stock market transaction tax is an ill-conceived policy. Yet it’s not Democrats’ first time at this rodeo.

“A transaction tax will only inject confusion into the marketplace at a time when the proper balance between consumer and investor protection, market integrity and stability, and competition needs to be maintained,” Steve Bartlett, president of the Financial Services Roundtable, wrote in a 2009 letter to then-Sen. Tom Harkin, who has since retired from Congress but was chairman of the Senate Health, Education, Labor, and Pensions Committee.

This tax is unlikely to advance in a Republican-held Congress. But it wouldn’t be surprising if someone like Sen. Elizabeth Warren injects the idea into the 2016 campaign in a bid to force the country on a sharp left turn.