On February 18th, the House Committee on Financial Services heard from witnesses as Congress investigates the events surrounding GameStop’s massive stock fluctuation. Spurred on by Reddit users and an online community, GameStop stock rose over 2,000 percent in January as hedge funds that shorted the stock took a major hit. As the saying goes, “never let a crisis go to waste,” and some politicians are attempting to use this unprecedented event and public uproar to heap more regulation and taxes onto an already heavily regulated industry. Congress should resist knee jerk reactions -- especially in the form of a higher financial transaction tax (FTT) -- that will make it more difficult for retail investors to invest.
The calls on the left for a higher FTT began almost immediately following the GameStop trading events, but this is not a new proposal on the left. NTU Executive Vice President Brandon Arnold has addressed the negative implications of this tax increase on many Americans -- not just Wall Street. There is currently a small FTT of roughly 2 cents per $1,000 traded. Calls to raise this tax to $1 per $1,000 traded would have massive ramifications for taxpayers, not just Wall Street investors. Increasing regulation and taxes will not only make it harder for retail investors to invest, but also could increase market volatility.
Rep. Rashida Tlaib (D-MI) tried to make the case for an increase in the FTT by claiming that hundreds of billions would be raised through the tax and these funds could be spent on important priorities. Besides the dubious claims about the amount that would be raised, an increase in this tax burden would likely hurt Americans saving for retirement. An increase in the FTT would not stop Wall Street from trading stocks, but it would raise barriers for retail investors to enter the market.
The costs associated with trading stocks have dropped drastically. According to the Pew Research Center, a majority of Americans now have investments in the stock market. The idea this tax increase will only hit Wall Street traders or the wealthy is false and would make investing more expensive for all Americans. According to a Vanguard study, an increased FTT could cost Americans 3 ½ years of savings. The oversimplified claim of Wall Street fat cats being the only “investors” will ultimately punish Americans who choose to save and invest in their future. Despite the negative rhetoric, the scope of this tax hike is not limited to the elite traders and investors -- it will be felt in the pockets of the majority of Americans.
Similarly, calls to force cost-free trading platforms, like Robinhood, to change their business model could heighten barriers to keep retail investors from participating in stock trading. Stock trading is already subject to heavy regulations and oversight. Calls to add more regulation or restrictions, like a proposed ban on short selling, would add another layer of burdensome regulation for Wall Street and Main Street alike. Short selling is risky, but Congress should not issue a heavy-handed ban on it. Shorting a stock does not cause market volatility and instead represents a viewpoint on the outlook for a particular investment. The resulting backfire for Melvin Capital after GameStop was bolstered by a flurry of online investments is an anomaly and does not require Congress to rush to restrict an individual or entity’s ability to participate in the stock market.
Additionally, claims that this tax hike would raise over $800 billion in revenue, as was the number thrown out by Rep. Tlaib, fail to take into account lower participation rates associated with the higher cost of investing. As the Tax Policy Center notes, France and Italy’s FTT raised only a fraction of the projected revenue. Taxpayers should also be wary of what this revenue will be used for. The deficit has surpassed an unprecedented $27 trillion and does not appear to be coming down anytime soon. As Congress appears set to spend an additional $1.9 trillion on coronavirus relief, and with a possible $3 trillion in additional spending still in the pipeline, taxpayers should be concerned about this tax being used as a pay-for instead of offsetting the skyrocketing debt.
As Congress appropriately exercises its authority to look into this issue, it’s important the hearing is not used as a Trojan Horse for an increase in taxes. Representatives French Hill (R-AR) and Alex Mooney (R-WV) drove this point home. The events surrounding the GameStop episode would have been nearly impossible to predict, and raising the FTT would be a “remedy” completely divorced from the problem. In Rep. Mooney’s closing remarks, he sums up the issue: “the financial transaction tax-supported by many Democrats would do nothing to prevent market manipulation or fraud, would have not prevented the market disruption in January, and most importantly would hurt retail investors.” This is true. Low barriers to entry allow more Americans to invest alongside Wall Street investors, and this one-of-a-kind event should not be held up as an excuse to pass taxes and regulations that hamper Main Street’s ability to invest in their future.