GameStop Frenzy Encourages Proponents of the Stock Trading Tax

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WSJ.com: Markets

The wild volatility in GameStop Corp.

Stocks this year has encouraged Democrats who support a tax on stock deals.

A Financial Transaction Tax (FTT) would raise money by collecting a fraction of the value of transactions in securities. Proponents say such a tax could help fund programs like President Biden’s $ 2 trillion infrastructure plan while curbing high-frequency trading and excessive speculation. Critics, including Wall Street lobby groups, say it is flawed policy that harms investors.

Left-wing politicians like Vermont’s Senator Bernie Sanders have long spoken out in favor of a transaction tax, with little success. Now that the Democrats hold the White House and the majority in Congress is tight, progressives have the best chance in years of passing a financial transaction tax. Potentially, such a tax could be passed without Republican support, using the budget voting process, which allows tax and spending bills to pass the Senate by simple majority.

Of course, the odds are still against an FTT congress. There is broader support among Democrats for other ways to increase revenue, such as raising the highest individual tax rate or the corporate tax rate, both of which were lowered under former President Donald Trump. Still, the idea of ​​taxing trades has gained prominence among more centrist Democrats in recent years, raising the hopes of FTT proponents.

“Members of Congress support and support the concept much more broadly than they did a decade ago,” said Antonio Weiss, an official in the Obama administration’s Treasury Department who proposed his own version of a transaction tax last year.

Mr Weiss’ plan provides for a tax of 0.1% on stock, bond and derivative transactions, which will be introduced gradually over a period of several years. Such a tax could bring in $ 60 billion annually, he estimates. Some lobbyists and tax policy advisors see his plan as a basis for a bill that could convince democratic moderates.


“One way to ensure that this tremendous wealth on Wall Street actually reaches the real economy is to enact and scrutinize proposals like a financial transaction tax.”

– Rep. Rashida Tlaib (D., Mich.)

Lately, the FTT issue has received new visibility from an unlikely source: GameStop. After the furious rally and subsequent crash of the video game company’s shares in January, politicians and experts have tightened control over high-speed trading, questioning whether the stock market is fair to retail investors. Some progressives have taken the opportunity to promote a financial transaction tax.

“One way to ensure that this tremendous wealth on Wall Street actually reaches the real economy … is to enact and review proposals like a financial transaction tax,” Rep. Rashida Tlaib (D., Mich.) Said at one Hearing of the House Financial Services Committee last month on the GameStop episode.

A bill sponsored by Rep. Peter DeFazio, D., Ore. To collect a financial transaction tax, has attracted South Carolina Democrat James Clyburn as a co-sponsor. The bill has a total of 27 co-sponsors, including five who added their names after the February 18 hearing. Further GameStop hearings are scheduled for later this month in the House and Senate.

In Albany, NY, some lawmakers are pushing to revive a New York tax on stock deals that the state has not levied since 1981. Proponents say this would prop up a state budget ravaged by the coronavirus pandemic, but corporate groups and New York Stock Exchange says this could lead to an exodus of financial firms and damage the state economy. A similar setback from Wall Street helped send out an invoice for tax business in New Jersey last year.

A financial transaction tax bill sponsored by Oregon Democratic MP Peter DeFazio has 27 co-sponsors.


Photo:

Samuel Corum / Getty Images

At the federal level, it is unclear whether Mr Biden would support a transaction tax. The White House has not made a formal FTT proposal, and business taxation was not part of Mr Biden’s campaign plan. As a candidate, he made conflicting comments on the matter, once saying a financial transactions tax would harm the middle class, but later gave an interview in which he appeared to be in favor of the tax.

The president’s team consists of some vocal FTT supporters like Jared Bernstein, a member of the White House Economic Advisory Council, and others who criticized the idea, including Treasury Secretary Janet Yellen. When asked about a transaction tax last month, Ms. Yellen said: “This could deter speculation, but it could also have negative effects.”

Wall Street and its allies in Congress say a transaction tax would make US capital markets less competitive and encourage trading activity to move overseas. They also accuse the FTT proponents of making overly optimistic forecasts about how much revenue such taxes would bring.

“Wherever this has been attempted in the past it has had a negative impact on market liquidity and has never come close to the level of advertised revenue,” said Kenneth E. Bentsen Jr., president of the Securities Industry and Financial Markets Association, in an interview.

The recent surge in GameStop and other stocks affects investors in opposing camps: traditional Wall Street firms and small investors who oppose the system. WSJ asked the same series of questions about WallStreetBets’ role in the trading frenzy. Photo illustration: Carlos Waters

Groups like Sifma warn that brokers would pass the tax costs on to investors and mutual funds would bear the tax costs each time they were rebalanced. While the rate paid for each trade seems tiny, it could add up to a high cost over time, industry groups say.

In June, the Vanguard Group published an analysis of how different types of transaction taxes would affect an investor who puts away $ 10,000 annually for 40 years. For a portfolio with a mix of equity and bond index funds, Vanguard estimated that a 0.1% tax on purchases would ultimately cost the investor $ 25,705 – or between 2% and 3% of their savings, which, under Vanguard’s assumptions on Jan. , Would increase to $ 2 million at the end of 40 years.

Transaction tax advocates say such industry studies are skewed to overestimate the impact on Main Street investors. “Financial transaction taxes mostly fall on the rich,” said Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center.

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Did the GameStop episode change your feelings about a stock trading tax? Join the following conversation.

It would not be unprecedented for the US to tax stock trades. The government imposed a similar tax from 1914 to 1965. Today, the Securities and Exchange Commission’s budget is backed by a small trading fee that raised nearly $ 2.6 billion for the agency in fiscal 2020.

Dozens of countries overseas have financial transaction taxes including France, Singapore, South Korea, and the United Kingdom. The global experience is mixed: a tax levied by Sweden in the 1980s caused much of the country’s trade to migrate elsewhere, while Hong Kong remained a global financial center despite imposing a type of transaction tax known as stamp duty.

Last month, Hong Kong announced that it would increase the stamp duty from 0.1% to 0.13%. This is the first increase since 1993 as it has hit a record budget deficit.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

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