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GameStop fiasco helps build momentum for stock trading tax – and Wall Street is furious

But there is a deep divide on the wisdom of a financial transaction tax. Progressives see it as a smart way to simultaneously curb predatory trade while funding ambitious programs to alleviate America’s inequality problem.

Opponents, for their part, portray a financial transaction tax (FTT) as a nightmare. Wall Street, which would take a hit, is already warning that such a levy would backfire on Main Street by increasing trading costs and depressing market liquidity.

“The odds are still against passing a financial transaction tax, but for the first time in a decade this proposal should be seen as a viable policy option rather than just a topic of discussion,” Isaac said. Boltansky, director of policy research at Compass Point. Research and trade.

Last week, House of Financial Services Speaker Maxine Waters said she was “very interested” and “certainly considering” a financial transaction tax.

Concentration of “ mind-blowing ” wealth

Lawmakers will certainly be tempted to tax transactions as this could raise huge sums of money at a time when Washington is strapped for cash.

A 0.1% tax on stock, bond and derivative transactions could net the federal government $ 777 billion over a decade, according to a 2018 estimate from the Congressional Budget Office.

“We have huge income inequalities in our society and a huge deficit. A financial transaction tax would be an incredibly efficient and gradual way to increase income,” said Aaron Klein, former head of the Treasury Department of the Obama Administration, to CNN Business.

The richest 1% of U.S. households would pay 40% of the total tax amount, while the poorest 60% would pay just over 11%, according to the Urban-Brookings Center for Tax Policy.
This makes sense, because the richest 10% of U.S. households owned 87% of all stocks and mutual funds, according to 2020 Federal Reserve data.

“The concentration of wealth in the stock market is mind-boggling,” said Klein, who is now a senior economic studies researcher at the Brookings Institution.

Although some argue that an FTT would be a disaster, the United States already has a tax, albeit a small one. About 2 cents for every $ 1,000 traded goes to fund the budget of the Securities and Exchange Commission. Due to the surge in trading volume during the pandemic, the tax rate to fund the SEC is lowered to just half a cent per $ 1,000 starting Thursday.

“There are fees today and the world is not over,” said Dennis Kelleher, CEO of Better Markets, a group that advocates for tighter monitoring of Wall Street. “The proposed fees are so minimal that no reasonable retail investor would ever notice.”

‘Unintended consequences’

The financial sector argues exactly the opposite.

They say that even a 0.1% transaction levy will cause market participants to pass costs on to consumers and make it harder to buy and sell securities by decreasing liquidity, which is a measure of ease of doing business. purchase and sale of securities. Some Wall Street companies might even try to move their operations out of the country to avoid the tax. The New York Stock Exchange recently threatened to flee New York, possibly to Texas, in response to transaction taxes being meddled by Albany.
GameStop fiasco helps build momentum for stock trading tax – and Wall Street is furious

“This approach has a long history of unintended consequences that will penalize American workers, retirees and families,” a spokesperson for the Coalition to Prevent Taxation of Retirement Savings told CNN Business.

This coalition includes the NYSE, Nasdaq (NDAQ) and UBS (UBS). Citadel Securities and Virtu Financial (VIRT), two high-speed trading companies that would be affected by a financial transaction tax, are also members.

“An FTT will increase transaction costs for investors – including individuals – to undermine the competitiveness of our financial markets and hurt the US economy as we work to recover from this pandemic,” the spokesperson said.

Some countries have tried and failed

James Angel, a professor at Georgetown University specializing in market structure and regulation, wrote an article funded by the Chamber of Commerce in 2019 that said a financial transaction tax would hurt Main Street by increasing the cost of transactions more than the amount of tax. .

“There is no such thing as a tiny tax that generates big revenues,” Angel said in an interview.

He pointed out how some other countries, notably Sweden in the 1980s, had abandoned these taxes after the volume of trade disappeared and incomes were depressed. (Of course, the United States, with its deep financial markets, massive economy, and world reserve currency, is not Sweden.)

GameStop fiasco helps build momentum for stock trading tax – and Wall Street is furious

“It really ruins the deal,” Angel said.

If trade volumes in the United States were to decline sharply, the FTT would not raise as much as the $ 777 billion estimated by the CBO.

Greg Valliere, chief US policy strategist at AGF Investments, said the chances of a financial transaction tax are “very slim” because moderate Democrats would be unlikely to support it.

“It would be a disaster. It’s a Pandora’s box that shouldn’t be opened,” Valliere said.

Of course, it is possible that TTF’s proposals to Congress will be scaled back, including lowering the rate or excluding smaller blocks of transactions.

Level the playing field

During last week’s congressional hearing on GameStop and Robinhood, Citadel Securities founder Ken Griffin warned that a tax would boomerang.

“We strongly believe that a financial transaction tax would hurt Americans trying to save for retirement,” Griffin said.

Klein, a member of the Brookings Institution, called Griffin’s comments a “selfish lie” because high-frequency trading companies like his are said to be among those suffering.

The GameStop trading frenzy drew attention to how Robinhood was able to bring commission-free trading to the masses.

Through a controversial practice known as payment for order flow, Robinhood and other brokers are paid to route retail transactions through market makers like Citadel Securities.
GameStop fiasco helps build momentum for stock trading tax – and Wall Street is furious

Payment for the flow of orders has made trading cheap and easy. However, critics say it really is Wall Street that is making the most of the deal by skimming pennies on every trade and getting ahead of retail orders to make a profit.

“We believe the markets today are rigged to favor high frequency traders,” said Kelleher, CEO of Better Markets. “The industry has taken a visible upfront commission fee and disguised it as an invisible payment for the order flow.”

In other words, the trade is not really free.

Kelleher thinks Congress should focus on taxing orders, not trades, because a staggering number of all stock orders (some estimates say 99%) are canceled due to high-frequency trading strategies. Critics say these orders are proof that high-speed traders are manipulating the market by creating an appearance of demand where there is none.

“A finance commission on orders could be the death knell for predatory high-frequency trading,” he said. “Everyone will be better off – except predators.”

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