With Wall Street Fees in Danger, Bloomberg Tries to Make Mom and Pop Afraid

Stock market (image: geralt/Pixabay)Bloomberg News is really pushing the frontiers in journalism. In order to give readers a balanced account (7/14/16) of a proposal by Rep. Peter DeFazio to impose a 0.03 percent tax on financial transactions (that’s 3 cents on every hundred dollars), it went to the spokesperson for the Investment Company Institute, the chief investment officer from Vanguard and an academic with extensive ties to the financial industry. It also presented an assertion about the savings from electronic trading from Markit Ltd. Based on this diverse range of sources, Bloomberg ran the headline:

Democrats Assail Wall Street With Plan That May Hit Mom and Pop

If Bloomberg were interested in views other than those of the financial industry, it might have found some people who supported the tax to provide comments for the article. Or it might have tried some basic arithmetic itself.

Most research finds that trading is price elastic, meaning that the percentage change in trading in response to a tax is larger than the percentage increase in trading costs that result from the tax. The nonpartisan Tax Policy Center assumed an elasticity of -1.25 in its analysis of financial transactions taxes.

This means that if the tax proposed by DeFazio would raise the cost of trading by 20 percent, then trading volume would decline by 1.25 times as much, or 25 percent. Investors would pay 20 percent more on each trade, but would be trading 25 percent less. This means that their trading costs would actually fall as a result of the tax. (With trading at 75 percent of the previous level, but the per trade cost at 120 percent of the previous level, the total cost of trading would be 90 percent of the prior level.)

The only way “mom and pop” get hurt in this story is if they make money on average on their trades. That is a hard story to tell. If mom and pop are lucky and sell their stock when it is high, then some other mom and pop are unlucky and buy the stock when it is over-valued. As a general rule, trading will end up being a wash. (If we stopped trading altogether, that would be a problem, but the taxes on the table would just raise costs to where they were 10 or 20 years ago.)

Of course, there is someone that gets hurt by less trading—the folks who were making money on the trades. That’s right, the financial industry. So Bloomberg‘s sources could expect to take a huge hit if Congress were to pass a tax like the one proposed by Mr. DeFazio. Based on the elasticity figure used by the Tax Policy Center and the revenue estimate from the Joint Tax Committee, DeFazio’s proposed tax would cost the financial industry more than $50 billion a year.

Since it’s not very compelling to hear a multi-millionaire complain about the prospect of a pay cut, it sounds much better to make up a story about mom-and-pop investors instead.

Economist Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC. A version of this post originally appeared on CEPR’s blog Beat the Press (7/14/16).

Bloomberg reporters Declan Harty and Annie Massa can be reached via Twitter at @DeclanHarty  and @antoniabmassa , respectively. Please remember that respectful communication is the most effective.

This piece was reprinted by RINF Alternative News with permission from FAIR.