The market has been volatile over the past year, but unions and some liberal Democrats want to tax stock and futures trades under the guise that this will make markets more stable. More taxes are not the answer.
Big Labor is pushing for a tax of one-tenth of 1 percent on every stock transaction. The AFL-CIO argues this would raise needed revenue and discourage speculative trading. The $50 billion to $100 billion collected per year would be used to fund infrastructure spending, which supports union jobs. One bill from Rep. Peter A. DeFazio, Oregon Democrat and chairman of the House Transportation and Infrastructure highways and transit subcommittee, would create a similar tax scheme on futures trades for the same purpose. Another would tax all security transactions to pay for the bailout of the financial industry.
Any tax will discourage trading. The legislation would introduce a double tax because it would hit both the purchase and sale, doubly undercutting the bottom line of every trade. This double tax is on top of existing federal and state taxes on profits. The tax burden reduces profits and thus the incentive for large corporate traders and small individual investors.
About 65 percent of all trading volume is executed by high-frequency traders using computers working on razor-thin margins. Lowering those already small margins with additional taxes is likely to result in less domestic trading and flight to less-taxed foreign markets. Every penny taken from stock transactions is one that cannot be reinvested into markets or the economy, potentially lowering economic growth.
Thea Lee, policy director for the AFL-CIO, acknowledged the economic problems of the plan, telling the Hill newspaper that the "big disadvantage" of taxes is that they discourage "some really productive activity." Even as Ms. Lee went on to deny that speculative trading has any productive economic benefit, she acknowledged that such trades make money.
Well, making money makes the world go around. Profits are reinvested or spent on consumer goods, which provides operating income for businesses. Those businesses employ people, who use their income to invest and buy things. Private enterprise depends on this cycle of money continuously changing hands. Taking wealth out of the system through taxation hurts the economy. That makes the system less stable, not more so.