“Don’t tax you, don’t tax me, tax that fellow behind the tree.” Those famous words were spoken more than 30 years ago by the late Louisiana Sen. Russel B. Long when Congress was looking for ways to raise revenue. Some members of Congress believe they’ve found the fellow behind the tree: the Wall Street “speculator.”
Burton Malkiel, author of the classic A Random Walk Down Wall Street gives us a very simple, straightforward argument against the trading tax in a Wall Street Journal Op-Ed this morning. Writing with Vanguard’s George Sauter, Malkiel makes the case that the proposed tax will reduce liquidity, end up costing the average investor rather than Wall Street, make future crises worse, and produce even more inefficiencies.
While I reject the Random Walk and the Efficient Market Hypothesis in general (which I have seen falsified several times), Malkiel makes some really important points here…
Proponents of a transactions tax misunderstand the way markets work. The bubble in home prices in the United States was not caused by the rapid buying and selling of individual family homes. The financial crisis was primarily a liquidity crisis and a credit crunch, and the major problem with collateralized mortgage-backed bonds was that they declined significantly in value and became illiquid. A transactions tax that would have reduced trading and made repurchase agreements more costly, could have made the problem even worse.
The chorus of pragmatic opposition grows. Are you paying attention, Congress?