The specter of a federal tax on financial-market trading has surfaced, as it perennially does, on the road toward the corridors of power. A number of candidates vying to become the Democratic Party nominee in the 2020 presidential election have made taxing securities and derivatives transactions a cornerstone of their platform, pandering to the basest populist sentiments: envy, fueled by ignorance.
The various purveyors of such proposals frame their efforts in different ways, such as attempts to rein in a putatively “out of control” Wall Street, drawing upon the language of vengeance (“Make Wall Street Pay!”) to gain support for what amounts to the spirit, if not the letter, of a bill of attainder. Others invoke the language of egalitarianism, promising that the allegedly “socially useless” activity of trading across physical and electronic securities markets will either be curtailed or — far more seductively — harnessed to pay for a new array of entitlements: “free” college education, student debt forgiveness, and a host of other solicitations.
(If the purpose of such a tax is, as others have proposed, to create a slush fund of sorts in order to support “future financial bailouts,” a vastly more market-oriented solution is for the government to, as it should, clearly and incontestably repudiate the possibility of any future bailouts.)
It’s first important to note the absurdity and duplicity of a term like “Wall Street.” To summarize the vast panoply of activities conducted by many millions of individuals — employed by tens of thousands of broker-dealers, hedge funds, investment banks, and mutual funds, and venture capital, private equity, management consulting, and other businesses, ranging in size from individual proprietorships to globally active firms — is as puerile a feat of political demagoguery as any. Only politicians, who flit opportunistically between meticulous nuance and dull monochromatics as it serves them, would find cause to use such a term.
As inadvisable as the bailouts were in 2008–10, they were fully paid back and — by the U.S. government’s own crowing admission at the time — ended up being “profitable.” It’s also needless to say that the 2007–9 financial crisis had essentially nothing to do with equities trading of any type, nor for that matter with the vast majority of fixed-income securities and derivatives trading that takes place daily. Political opportunism requires looking not where causes are (Congress, government-sponsored enterprises, and highly idiosyncratic lines of business) but where fortunes materialize.
And like any tax, a tax on financial-market transactions will be passed on to customers — and far more impactfully on large financial institutions than on small hedge funds, proprietary trading firms, or individuals with retail brokerage accounts. Higher transactions costs and lower liquidity (because, if the tax is assessed on a per-transaction basis, trades will tend to be grouped into larger transactions to save money, and such transactions, in turn, are likely to have greater market impact) will adversely affect the annual return on retirement accounts of all types.
If, as is sometimes claimed, the financial industry represents a repository of unjustifiable wealth — and setting aside the spirit of vindictiveness intrinsic to such overtures — there are a handful of other commercial sectors that similarly create inordinate fortunes for a select few.
Professional sports and the entertainment sector are, like finance, characterized by steeply progressive earnings. And if financial transactions are unproductive, it’s difficult to see acting or throwing balls as being any more socially efficacious. Thus, if the goal is to raise $800 billion, perhaps professional sports and Hollywood should also be assessed for their alleged contribution to inequality, and for serving as bastions of intolerable concentrations of wealth.
Breaking $800 billion into a $266 billion obligation for “Hollywood” — one-third of the total — would be simple. In the average year, about 550 films are released; each of those is backed by a script numbering between 90 and 120 pages (average: 105 pages). On each of those is an average of 250 words, assuming single-spaced pages. A per-word “script tax” on released films, in order to reach the goal of $266 billion per year, would amount to approximately $18,350 per word. One can’t imagine that the highest-paid studio heads, directors, producers, and actors in the motion picture industry would object, especially considering the incredible gap between their annual earnings and those of lowly on-set coffee fetchers, understudies, and others even further down the food chain.
Alternatively, Hollywood could send the U.S. government $79,000 per second for each new film, up to their $266 billion obligation.
Given the plethora of statistical data captured on professional sports, taxes imposed there would be even easier to estimate. Dividing a $266 billion federal obligation into three equal portions — approximately $89 billion each for Major League Baseball, the National Football League, and the National Basketball Association — could be done in the following way.
For professional baseball, each team throws an average of 146 pitches per game. In one game, roughly 300 pitches are thrown; with 2,430 games each season, approximately 730,000 pitches are thrown during a full MLB season. A tax of $122,000 per pitch would meet the goal. (Of course, someone would eventually have the temerity to point out that the New York Yankees had three times the revenue of a number of the lowest-ranked pro baseball teams in 2018, but that would most assuredly receive the sort of blithe dismissal that differentiating between a mom-and-pop mutual fund brokerage and a global investment bank is likely to receive.)
NBA teams would fork over $320,000 per basket each season. And the NFL would pay nearly $60 million per touchdown.
If trading is so lucrative yet superfluous to the prosecution of civil life, certainly acting and throwing balls should similarly be drawn into the conversation, applying the most outward-facing metrics. Applying these taxes would furthermore ensure that Hollywood and the American professional-sports complex work for Main Street.
This, of course, is an exercise in reductio ad absurdum policy extension. Yet a tax on trading within financial markets has no sounder basis than any of these tongue-in-cheek suggestions. Penalizing voluntary transactions, the mutually cooperative transfer of risk, and the price-discovery process — whether within the realm of long-term investing, intra-day trading, commodity hedging, or, yes, unbridled speculation — treats market participants on every level as unscrupulous actors.
It would serve only to hamper the use and movement of capital. More than a feature or a factor, trading is the very soul of the market economy. Taxing it is a sure path to killing that soul.