Earlier this week, the AFL-CIO, building upon a suggestion made last week in the UK, proposed that the federal government impose a 1/10 of 1 percent tax of all stock trades. The union group argues that such a tax would reduce non-productive speculative activity in the stock market.
First of all, we have all sorts of transfer taxes on housing, and yet we still had a housing bubble. So much for small taxes stopping speculative activity. If an investor expected to double his money, it seems quite a stretch to believe that such a small tax would discourage him.
More importantly, our recent financial crisis was not triggered by too much equity (like stocks) but by too much debt. In taxing stock transactions, we only add to the already favorable treatment of debt compared to equity, encouraging even greater leverage in our financial system.
The real purpose of this tax on speculation becomes apparent when the AFL-CIO suggests what the money should be used for…building new infrastructure that would require the hiring of unionized workers. The AFL-CIO should stop hiding behind the spin of stopping speculation and directly engage in the real debate: the massive size of our federal government and the unsustainable fiscal path we are on.