The kids want to elect Bernie Sanders president partly because they want Wall Street to Feel the Bern. But his centerpiece idea to punish Big Finance — a tax on all Wall Street trades — would make us all pay more without fixing the problem.
How? Stock traders would pay $50 to the government for every $10,000 bought or sold. Bond and derivatives traders would pay less. Sanders would use the money from this “tax on Wall Street speculation” to give everyone a free public-college education.
The theory Sanders is aiming for is sound: If you want less of something, you tax it.
But — unlike, say, smoking, which Mike Bloomberg tried to tax out of fashion — some stock and bond trading is good, and some is bad.
If you’re young and working, it’s good to buy a few shares of stock every year, to hold them till retirement. It’s bad, however, for huge firms to do trading that hurts people: “front-running,” which means buying and selling stocks based on knowing how other people are about to trade (because you can see their orders).
Thankfully, like most things, the worst kinds of stock trading are already illegal. It would be fine — and welcome — if Sanders said he’d simply bring old-fashioned rules enforcement back to Wall Street.
The tax, though, doesn’t do that. It would deter some heavy traders from “speculating,” but other heavy traders — like government pension funds — would just pass this new cost on to the local and state taxpayers who already guarantee these pension funds’ performance.
And by the way: Washington already imposes a heavy tax on speculation. If you sell a stock after having it for less than a year, you pay double the normal income tax rate on any profit.
Meanwhile, what’s really causing all the speculation and volatility in the financial markets is other federal policies. Interest rates have been near zero for eight years now. To get any kind of return, financial firms have poured record amounts of money into increasingly risky investments. It’s hard to tell what anything — from stocks and bonds to houses — is really worth.
But that’s not because of too much trading. It’s because Washington never wanted to do the hard work of weaning our economy off cheap debt — and so it uses interest rates to push up asset prices. That way, everyone feels rich (or less poor) without actually having to do the work of becoming less poor.
Also, Sanders isn’t willing to extinguish the behavior he hates — and give up the money. He wants a lot of money from his trading tax: $300 billion a year.
Whether you’re for or against a tax, this figure is just crazy. To put it in perspective: The Congressional Budget Office estimated three years ago that a much smaller tax would bring in $25 billion a year.
Trying to squeeze out more than 10 times that amount could kill trading volumes. Such a high fee would make stocks harder to buy and sell — and thus less valuable. It could knock stock prices down by 10 percent or more. The Tax Policy Center, a moderate group, has said that even a smaller tax would be “almost certain to reduce asset prices.” That, in turn, could hurt consumer spending.
Conversely, if the tax didn’t kill trading volumes, Sanders is in the odd position of having the government profit from something it supposedly detests.
And is it a great idea to depend on Wall Street for nearly 9 percent of all federal tax revenues?
In an economic crisis, Wall Street stops trading anyway. New York state and city have long suffered massive boom-and-bust cycles because of our dependence on Wall Street. Under Sanders’ plan, the federal government would be in the same position — taking in less taxes exactly when it needs those taxes in a recession.
It’s OK for Sanders to be against harmful Wall Street speculation. But he should put out a plan to curb it, not make money off it.
Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.