The recent Reddit-fueled GameStop stock surge shined the spotlight on the investing strategy of short selling. While Congressional Democrats were quick to single out short sellers as one of the villains in this story, their push to impose new regulations and taxes is a solution in search of a problem. 

The truth is, short sellers are a product of a well-functioning market. Lawmakers should reject any effort to restrict or ban short selling.

To sell a stock short, investors borrow shares of a company from another investor, typically broker-dealers. Short sellers then sell the borrowed shares directly on the market. Later, when the borrowed shares must be returned, they repurchase the same number of shares borrowed and return them to the broker. Instead of buying low then selling high, short sellers’ profit from the difference when they sell high and then repurchase low. 

There is nothing sinister about this practice. Instead, it occurs when investors believe that a company is overvalued. 

Following the GameStop rally and the media’s focus on the story, Sen. Elizabeth Warren (D-Mass) issued a statement condemning the “casino-like” speculation done by short sellers and demanded SEC involvement. The House Financial Services Committee also hosted two separate hearings on the practice of short selling. These concerns are misguided.

Short selling can soften the effects of a market crash. Despite the left's effort to convince the public otherwise, short selling is not responsible for market crashes and economic downturns. Some investors will short a stock when they think it is overvalued. Other investors, as shown as the recent rallies in GameStop and other companies, will buy a stock they think is too heavily shorted. Both practices help promote efficient investing and provide information to markets, ultimately softening the blow of a downturn.

For example, the 2008 market crash could have been far more widespread if short sellers hadn’t recognized the housing market was overvalued. Arbitrarily restricting this trading through new taxes or regulations will likely lead to severe pain if the country experiences another crash.

Short selling can expose fraud which others failed to find. Short selling serves a market purpose -- the work of short sellers incentivizes the discovery of significant fraud that financial auditors and regulators fail to find. Economists have shown that information from short sellers support price discovery within markets, which helps educate investors.

Short selling has been used to expose fraud and illegal activity on numerous occasions:

• Jim Chanos, president of Kynikos Associates, notably profited from shorting Enron after observing significant insider selling and reading through questionable energy trading contract disclosures in regulatory filings.

• Nate Anderson at Hindenburg Research published a short report raising concerns about claims the electric car manufacture Nikola was making and their ability to timely produce vehicles. His research included gathering recorded phone calls, text messages, private emails, and behind-the-scenes photographs to highlight dozens of false and misleading statements made by Nikola and its founder Trevor Milton. 

• Muddy Waters Research’s Carson Block sold short the fraudulent Chinese café chain Luckin’ Coffee after analysts recorded over 10,000 hours of store traffic video and found that Luckin inflated its revenue numbers based on customer traffic that did not exist.

Short selling comes with significant risk, just like any other investment. Far too many politicians refer to short selling as predatory, with an inevitable profit to be made on the backs of others. This is entirely misguided. Just like other investments, short sellers are taking a significant risk. 

During the GameStop rally, Melvin Capital lost almost $6 billion in capital from its short position. Investors who bet against Tesla in 2020 lost $38 billion as the electric carmaker’s stock surged during the pandemic.

Additionally, short sellers' careers depend on them remaining credible; otherwise, their research reports and disclosures would not be taken seriously. Thus, concerns about purely predatory short selling, and the success of those endeavors, are empty. 

Short sellers provide value to the market by investigating corporate malpractice and fraud and should be welcomed as a third-part check for healthy markets. In other words, short selling is a feature, not a bug, of a well-performing market.

Congress and regulators should refrain from restricting or banning short selling, they harm price discovery mechanisms and interfere with market due diligence.

Americans for Tax Reform supports the EQUAL Act  – a measure that promotes equality under the law by eliminating unequal mandatory minimum sentences between crack cocaine and powdered cocaine.     

Equal and fair treatment under the law is a sacred tenant in the United States. This legislation creates a more equal system by establishing consistent punishments for abusing the same chemical substance, regardless of physical form. That is why a coalition of 28 organizations wrote a letter supporting this legislation. 

In 1986, Congress passed the Anti-Drug Abuse Act, which enhanced penalties for drug crimes. This law included separate provisions for cocaine in the powdered form and cocaine in the crack form. Five grams of crack cocaine had the same mandatory minimum sentence as 500 grams of powder cocaine. A ratio of 100:1.   

This sentencing ratio was narrowed to about 18:1 with the bipartisan Fair Sentencing Act of 2010. However, any such disparity for possessing a chemically identical substance serves no real-world purpose. The EQUAL Act would eliminate any disparity in the punishment between powdered and crack cocaine.  

The enhanced punishments for crack cocaine were designed to target “kingpins” and “middle level dealers,” however research conducted by the U.S. Sentencing Commission found that it primarily impacted low level dealers. Additionally, research has shown that these different mandatory minimums for crack cocaine has resulted in 65% higher sentences for African Americans and Hispanic Americans.   

The EQUAL Act also provides the opportunity for pending and past cases to apply for a reduced sentence based off this new change by Congress.  

You can learn more about the bill HERE.  

Labor Secretary Marty Walsh today said that most gig workers in the United States should be classified as “employees,” not independent contractors.  

“… In a lot of cases gig workers should be classified as employees... in some cases they are treated respectfully and in some cases they are not and I think it has to be consistent across the board,” Walsh told Reuters. 

Reclassifying gig workers in this way would be devastating to independent contractors, as many would lose work.  

Further, neither rideshare drivers themselves nor the American people consider drivers to be employees. Even more damning, most rideshare drivers don’t want to be employees.  

By a 3-1 ratio, Americans consider rideshare drivers to be independent contractors and not employees, according to a landmark Pew Research Center survey.

Pew Research Center conducted a sizable survey of 4,787 American adults and found that most Americans who were aware of the regulatory debate surrounding these areas of the economy do not consider rideshare drivers to be employees, and believe the government should use a light regulatory touch in this area of the economy. 

As noted by Pew, most rideshare users do not consider drivers to be employees. In fact, “66% of ride-hailing users think of the drivers who work for these services as independent contractors, while 23% view them as employees of the app or service.” 

As noted by Pew, "the clear preference for a light regulatory approach among partisans in all camps is striking." 

Similarly, most users consider these to be companies software companies as opposed to transportation companies.

Here is the Pew Research graph that shows these two results:

 

An Edelman Intelligence survey found that the freedom to be an independent contractor is vital to rideshare and food delivery drivers, as nine out of ten drivers on app-based platforms "began driving because they needed a job where they could control their work hours." About 72 percent of drivers supported California Proposition 22, affirming their right to be an independent contractor, not an employee. 

Democratic-leaning Benenson Strategy Group and Republican-leaning GS Strategy Group conducted a survey which found that 77 percent of Drivers say flexibility is more important than receiving benefits. In other words, Drivers prefer flexibility over the benefits of employment by a margin of more than 3-to-1. 

It is clear that drivers prefer to keep independent contractor status, therefore maintaining their independence and flexible work schedule. In fact, nearly 70% of drivers would quit if they had to take on a traditional employment role with Uber. 

Rideshare services have been revolutionary when it comes to people’s access to transportation, safety, and even health. If the Biden administration is successful, rideshare services will likely become more scarce and more expensive.  

By a 5:1 ratio, residents of majority-minority neighborhoods say rideshare services like Uber and Lyft “serve neighborhoods taxis won’t visit" according to the Pew survey.

"Ride-hailing services are seen by minorities as a benefit to areas underserved by taxis," the research found. 

Over half (53%) of ride-hailing users living in majority-minority communities communicated to Pew Research Center that ride-hailing provides service to neighborhoods where traditional taxi services are scarce. Only 10% of those respondents disagreed with this statement. 

Access to transportation is vital in these areas. 

As Sara Heath of Xtelligent Healthcare Media explains, “Rideshare companies, such as Uber and Lyft, are cruising into the healthcare spotlight. As medical professionals focus on improving patient access to care and addressing the social determinants of health (SDOH), these rideshare services are a cheap and effective option for meeting industry needs… For millions of patients across the country, getting a ride to a medical appointment is a genuine challenge. Public transportation can be unreliable or unavailable, many individuals lack access to their own vehicles, and patients may not always be able to secure a ride from a friend or family member at the right time.” According to the CDC, access to transportation is one of the most significant social determinants of health. 

It is important that we protect independent contractors’ status as ICs and ensure that their work remains flexible. Both drivers’ livelihoods and users’ access to transportation is at stake. 

Americans for Tax Reform today condemned the decision by the Food and Drug Administration (FDA) to begin the process of banning menthol cigarettes. The proposal is also opposed by over two dozen of the leading civil right groups in the United States, including the American Council on Civil Liberties (ACLU), the National Black Justice Coalition, and the Law Enforcement Action Partnership, as well as the Rev. Al Sharpton.

“At a time the nation is rightly focusing on over-policing of minority communities and criminal justice reform, it beggars belief the Biden Administration wants to criminalize a product used by 12 million Americans, predominantly from minority populations” said Tim Andrews, Director of Consumer Issues at Americans for Tax Reform. “The evidence clearly demonstrates that introducing prohibition will do nothing to reduce smoking rates, but will expose minorities to further over-policing”.

Mr. Andrews also noted the evidence from other jurisdictions where menthol bans were imposed stating that “While the majority of menthol smokers will switch to non-menthol tobacco, over 20% will continue to purchase on the black market, not only exposing them to persecution, but funding sophisticated international criminal syndicates. According to the US Department of State, illicit tobacco’s links to funding terrorist organizations is already a serious threat to national security, and this would just make the problem even worse, while also depriving state governments of excise revenue putting state government programs at risk.”

Mr. Andrews concluded: “If the FDA were serious about smoking rates, they should follow the science – and not radical activists. The science is overwhelmingly clear that the best way to reduce smoking rates is by embracing reduced risk non-combustible nicotine delivery systems proven 95% safer than smoking, between two and five times more effective than any other quit smoking technique, and according to Georgetown University Medical Center, which have the potential to save 6.6 million lives. These technologies, ranging from vapor to other tobacco products, some of which the FDA already authorized to be marketed as reducing cancer risk for people who switch,  to “heat not burn” devices, have already led to the sharpest decline in smoking rates in history. Rather than reintroducing the failed polices of the past like prohibition and put some of the most vulnerable in our society at even more risk, the FDA must follow the science and embrace these life-saving technologies."