During a week when the three major stock market indexes reached record highs, some members of Congress decided to solve a problem that does not exist by calling for new taxes and regulations, including a financial transactions tax (FTT) and restrictions on short sellers, that would cause significant disruption to financial transactions and reduced returns for tens of millions of investors.

Sen. Chris Van Hollen (D-Md.), who serves on the Senate Banking, Housing, and Urban Affairs Committee as well as chair of the Senate Appropriations Subcommittee on Financial Services and General Government, said during a Banking Committee hearing on Wednesday, March 10, that he and Sen. Brian Schatz (D-Hawaii) are planning to reintroduce their bill to impose a 0.1 percent FTT.  He claimed it would “cut down high-frequency trading and its risks to market stability” and “generate billions of dollars that we could invest in greater opportunity for other Americans.  It would reduce wealth and economic inequality and reduce volatility in the market.”  He also called it a “high roller fee.”

Sen. Van Hollen managed to promote several inaccurate, misleading, and damaging ideas in just a few sentences of his testimony.  As noted in a March 9, 2021 letter signed by 27 taxpayer groups, an FTT would be a tax on the investments of the “53 percent of American households that own stock and the 80 to 100 million Americans that have a 401(k).”  It would have a particularly negative impact on public sector pensions for firefighters, police officers, and teachers.  It would also cause lower savings and retirement income, and according to a 2021 Modern Markets Initiative study, a typical 401(k) retirement plan could lose $45,000 to $60,000 over the time it exists.

An FTT has been proposed for many years, and it has consistently been found lacking.  A December 12, 2011 Congressional Budget Office letter to then-Senate Finance Committee Ranking Member Orrin Hatch (R-Utah) said that imposing an FTT in the U.S. would “raise the cost” and “decrease the volume of transactions” while making certain types of transactions “unprofitable.”  It would “probably reduce output and employment.”  The CBO noted that the tax would have a greater impact on individual investors with smaller and less frequent trades than institutional investors with larger and more frequent trades, which contradicts Sen. Van Hollen’s claim that it would impact “high rollers.” 

Imposition of an FTT has been an abject failure around the world.  In Italy and France, where an FTT was enacted in 2012, less than a quarter of the expected revenue was raised.  Sweden’s FTT was repealed after trading moved to London to avoid the tax, and capital gains revenue dropped due to a reduction in stock sales inside the country.  An August 2019 Center for Capital Markets report cited other countries, including Austria, Denmark, Germany, Japan, the Netherlands, Norway, Portugal, and Spain, where the expected revenue was not raised, trades were reduced, and the FTT was repealed.

The Banking Committee hearing included criticism of short selling, with claims that it was a leading cause of market volatility, crashes, and economic downturns.  Like the FTT, calls to  regulate short selling have been around for many years, and both ideas were discussed at great length following the financial crisis and Great Recession that began in 2008.  A December 3, 2010 article by Daniel Indiviglio in The Atlantic, “Is Short Selling Evil?” responded to Washington Post business and economics columnist Stephen Pearlstein’s “four fallacies” about short selling, and concluded that, “Investors should know when the market is getting too carried away.  That can help to prevent bubbles, the avoidance of which has become one of the biggest challenges markets face.  If only there were more bold investors that began shorting the housing market in 2005 and 2006, or tech stocks before they got out of hand in the late 1990s.  Short investors help to expose irrationality in the market, and that makes everyone better off.” 

These conclusions were reiterated in a February 23, 2021 TheStreet article by Doug Kass.  He wrote that most investors should avoid short selling because it is risky.  In regard to its positive impact, there are “a number of benefits both directly to the capital markets themselves and indirectly to the real economy.  Theoretical, academic and empirical studies have shown that short selling one, improves overall market quality by contributing to price efficiency; two, improves liquidity; and three, has corporate governance benefits.  And historical bans and restrictions on short selling have proved to negate many of these benefits, to the detriment of overall market quality.”

Members of Congress who seek to tax financial transactions and ban or severely restrict short selling need to do a lot more homework about how markets work, or they will get a failing grade from taxpayers, investors, and their constituents.