On February 18th, the House Financial Services Committee will a hearing exploring the GameStop-Robinhood controversy entitled “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.” 

Lawmakers will hold this hearing to look at ways to better protect investors and prevent market volatility. However, some lawmakers have already made up their mind what the “solution” should be: a $1 trillion financial transactions tax (FTT). 

Rep. Ilhan Omar (D-Minn.), Rep. Ro Khanna (D-Calif.), Sen. Bernie Sanders (I-Vt.), Rep. Peter DeFazio (D-Ore.), and others on the progressive left have already called for this new tax, which would be imposed at a rate of 0.1 percent on any buying and selling of stocks, bonds, and other financial instruments. 

If imposed, an FTT would harm investors, restrict economic growth, would fail to raise as much revenue as supporters claim. While the 0.1 percent rate may seem like a small amount, it would be imposed on every single trade. 

While the Left claims this tax will make wealthy hedge funds pay “their fair share,” the FTT is really a tax on American savers and investors, including the 53 percent of American households that own stock and the 80 to 100 million Americans that have a 401(k). 

The recent GameStop trading controversy and negative perceptions of the hedge fund industry are simply excuses used by Democrats to push an agenda they already had – trillions in new taxes on the American people. Republicans on the Committee including Ranking Member Patrick McHenry (R-NC), Rep. Tom Emmer (R-Minn.), Rep. Andy Barr (R-Ky.), Rep. Bill Huizenga (R-Mich.) and other conservatives must hold the line against any new tax on American investors. 

An FTT will harm American retirees and savers including those that have their investments in 401(k)s, pensions, and index funds. 

This tax will fall especially hard on public sector pensions including those used by teachers, firefighters, and police officers rely that rely on hedge funds for retirement security. In fact, an FTT would cost pension funds billions of dollars every year, leading to fewer savings, less retirement income for retirees, and underfunded pensions. 

According to a study by BlackRock, a financial transaction tax of 0.1 percent would result in an investor losing $2,300 in returns on a $10,000 investment in a global equity fund over ten years. Similarly, a 2021 study conducted by the Modern Markets Initiative found a proposed financial transaction tax  would cost $45,000 to $65,000 over the lifetime of a 401(k) account.   

FTTs have a history of failure. In 1984, Sweden imposed a financial transaction tax, a proposal that lasted just six years. Even though investors were restricted in moving capital to foreign markets, most trading migrated to London to avoid the tax. Not only did this mean the FTT raised little revenue, capital gains tax revenue dropped because of a reduction in sales. When it was abolished in 1990, investment began to return to Sweden. In fact, several countries have experienced the same FTT process: a FTT is made law, the tax is reduced, the tax is finally eliminated. According to the Center for Capital Markets, this has also happened in Spain (1988), Netherlands (1990), Germany (1991), Norway (1993), Portugal (1996), Italy (1998), Denmark (1999), Japan (1999), Austria (2000), and France (2008). It was even repealed here in the United States in 1965 through a bipartisan vote, due to its failure. In the years following the repeal, trading volume in the United States increased substantially.  

An FTT does not raise the revenue supporters claim it does. The Congressional Budget Office found that imposing a FTT in the U.S. would “decrease the volume of transactions” and “probably reduce output and employment.” Some have predicted that a financial transactions tax would raise little, if any, net revenue because of these negative impacts.  

FTTs also cause capital to flee to jurisdictions that do not tax transactions, further reducing revenues. When Italy and France imposed FTTs in 2012, both countries raised less than a quarter of expected revenues.   

Lawmakers should not overreact to short selling, which is a common, well-regulated practice. It is a function of the free market — investors will short a stock when they believe it to be overvalued. 

In-depth empirical research has found that short selling is not responsible for market crashes and economic downturns. Instead, it provides efficiency and information to markets, ultimately softening the blow of a downturn. The 2008 market crash could have been far more widespread if short sellers hadn’t recognized the housing market was overvalued. Punishing these practices will likely lead to severe pain if we experience another crash. Rather than solving market volatility, an FTT could make this problem worse as there would be fewer buyers and sellers and therefore more price jumps.

Once again, Democrats are not letting a crisis go to waste. They are exploiting the GameStop-Robinhood controversy as an excuse to push their ultimate goal – new taxes on the American people. 

A $1 trillion financial transactions tax would punish investment, leading to market volatility and a reduction in output and employment.