Until late February Republican Presidential candidate Patrick Buchanan seemed to have the "dumb economic idea of the year" award locked up, but now he's in a close race with Sen. Jeff Bingaman, D-N.M. Yes, Mr. Buchanan's idea on trade - building tariff walls around the U.S. borders to protect inefficient U.S. industries - is pretty stupid, but Sen. Bingaman's proposal of an excise tax on short-term securities trades is right up there with it.
Unfortunately. the excise tax on short-term trading has more lives than Dracula - it has crawled out of its crypt at least three times in the past two decades - and if it ever escapes from under the Capitol dome, it will cause more devastation than Vlad the Impaler, the reputed model for Dracula, ever did.
Sen. Bingaman's proposal is one of many ideas floated by a Democratic task force appointed to find ways to end middle-class anxiety over stagnant wages and potential loss of jobs. What's wrong with it?
First, it's unnecessary. Most large institutional investors hold their largest holdings for long periods. Most are, in fact, investors - not traders. They buy their core holdings expecting to hold on to them for years, and do so unless their analysis of a company's long-term prospects changes. The Democratic proposal displays a profound ignorance of the way investment managers make buy and sell decisions.
The Democratic proposal apparently is also based on the perception that investors punish companies that invest in research and capital equipment for the long term, and drive them to slash costs and jobs unnecessarily. But research over the years has shown that such companies carry higher price/earnings multiples than companies that under invest.
Second, it is unlikely to have its desired effect, and the law of unintended consequences would certainly come into play. It is unlikely to have its desired effect because investors, especially institutional investors, simply would shift much of their trading to offshore markets, where their transactions would be free of restriction and largely invisible to the U.S. authorities.
It is therefore highly unlikely either to induce institutional investors to hold for two years securities they are uncertain about, or to raise the $27 billion to $62 billion a year in revenue Sen. Bingaman projects. It would certainly harm the U.S. stock, bond and futures markets, which employ hundreds of thousands of people directly and indirectly.
An industry in which the U.S. leads the world would wither and become a second-rate player in world capital markets. Companies raising capital would not use U.S. investment banking firms, which currently lead the world in creativity, nor the U.S. stock exchanges.
Third, the proposal is badly drawn as initially proposed. It taxes "any security sold within two years after purchase." That appears to include all securities - even Treasury bills that mature in six months, even futures and options, which also expire in far less than two years. Yes, lawmakers probably would exempt T-bills, but if they exempt options and futures, much of the short-term trading they are trying to end would migrate to the futures and options markets at the expense of the stock exchanges.
If they don't exempt futures and options, then these exchanges too would be devastated as their transactions became uncompetitive with those on foreign exchanges.
This is a strong candidate for the dumb economic idea of the year, but it's early yet.
