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In the economist's utopian vision of the stock market, clearheaded investors diligently evaluate companies and invest only in the ones they expect to grow and thrive. In the process, investors direct resources where they'll be most productive, benefiting the overall economy.
The GameStop circus over the last few weeks showed again that the real stock market is a far cry from Utopia. To some, GameStop was a chance to make a quick buck on a speculative roller coaster. To others, it was a way to stick it to Wall Street. But if taking on Wall Street really is the goal, meme-fueled rallies aren't likely to bring lasting change.
A growing chorus of policy wonks is arguing we should channel populist discontent with Wall Street in a more productive direction. Instead of trying to hurt hedge funds by artificially inflating the price of a company that's basically Blockbuster for games, they say, we should mobilize to impose a tax on stock trading. This could help bring greater sanity to trading and limit one of Wall Street's competitive advantages: high-frequency trading with supercomputers that can make like gazillions of transactions per second.
"A small tax — 0.1% — on each Wall Street trade would reduce high frequency trading, a practice which drains profits from retail investors and benefits only the very rich," tweeted Congresswoman Ilhan Omar during the GameStop firestorm.
The idea behind this kind of levy is not new. It's had all sorts of iterations over the years: a financial transactions tax, a speculation tax, a Tobin tax, and — years before the stock trading app was founded — a "Robin Hood" tax. A core idea behind all of these taxes has been to raise the cost of trading in order to discourage investors from making frivolous bets, and to encourage them to invest only if they believe companies will be profitable over the long run. But rather than rising, the cost of trading has gone in the opposite direction in recent decades. Today, for both Wall Street investors with supercomputers and small-time investors with apps, it costs almost nothing to trade.
From James Tobin to Larry Summers, a long line of economists has supported the idea of a financial transaction tax. In his magnum opus, The General Theory of Employment, Interest and Money, John Maynard Keynes expressed his enthusiasm for one. "The proper social purpose" of Wall Street, he said, "is to direct new investment into the most profitable channels in terms of future yield." But when it begins to resemble "the activities of a casino, the job is likely to be ill-done." Hello, GameStop.
In 2011, a thousand economists from 53 countries signed a letter urging G20 countries to implement a small financial transaction tax to raise funds for fighting global poverty. But not all economists support the idea. Right-leaning economists and think tanks tend to argue that it will cause trading to move to other nations, discourage trades that benefit the overall economy, and fail to raise much money.
Numerous countries already have financial transaction taxes, and, we should note, their track record is mixed. Sweden adopted one in 1984, which they kept tweaking to try to get to work. By 1986, if you bought or sold a stock through a Swedish brokerage firm, you faced a 1% tax. Foreign brokerage firms, however, were exempt — as a result half of all stock trading moved from Sweden to London. Meanwhile, the tax never raised much revenue, so it was eliminated in the early 1990s.
The UK's financial transaction tax has been a bit more successful. In 1694, King William III levied a stamp duty on all paper transactions. A version of that levy still exists, taxing many stock trades at 0.5%. Unlike the defunct Swedish tax, it applies to trades of shares of any UK company, regardless where traders are based. A report from Brookings finds the British stamp duty, unlike the Swedish version, has been pretty successful, showing how much policy details matter.
The United States actually also has a financial transaction tax. It funds the Securities and Exchange Commission (SEC). But the tax is so minuscule nobody seems to notice it. For most kinds of financial transactions, the rate the SEC will charge for 2021 is $5.10 for every million dollars traded (which, by the way, is a tax rate of .00051%). Since the financial crisis, a long list of progressive politicians have called for new financial transaction taxes, including Rep. Peter Defazio, who introduced such a bill last month.
Would a financial transaction tax have stopped the kind of wild swings in GameStop's stock we've seen over the past few weeks? Probably not. With a 0.1% tax, if you bought $400 worth of GameStop stock, the tax would be just 40 cents. But such a tax would add up to a much bigger deal for high-frequency traders, who can make multiple trades in milliseconds. While it may not have the razzle dazzle of Reddit-inspired stock roller coasters, taxation might be a more effective way to curb Wall Street excesses.
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