By Brad Polumbo
State lawmakers in Albany, New York are considering imposing a tax on financial transactions. If they go through with it, the iconic New York Stock Exchange might actually leave the Empire State.
The tax legislation in question was recently proposed by state Senator Julia Salazar and several of her Democratic colleagues. It would impose a 0.5 percent tax on stock trades and smaller taxes on bond and derivative trades. These levies may sound minor, but they add up when applied across millions of trades—and Salazar says the tax would raise $12-29 billion in revenue.
“This is about economic justice,” she said in a television interview discussing her proposal. “It’s critical in this moment that we are raising revenue in order to meet the needs of the state and provide financial relief for working New Yorkers.”
“It’s very difficult for New Yorkers right now, we’ve been the epicenter of the COVID-19 crisis and [we’re] going to continue to see the effects of the economic crisis,” Salazar continued. “So it’s actually all the more urgent that we ask the ultra-wealthy to pay their fair share so that we can make New York a more livable place for the rest of New Yorkers.”
How a ‘Tax on Wall Street’ Could Backfire to All New Yorkers’ Detriment
The intentions of progressive lawmakers are clear: To redistribute wealth from the lucrative financial sector to struggling New Yorkers. However, the inadvertent result of this move may well be to destroy New York’s status as an international financial hub—and leave the untold thousands of New Yorkers who directly or indirectly earn a living from it worse off. (Without even raising much tax revenue).
Indeed, the president of the New York Stock Exchange is openly warning that the famed financial center may relocate if such a punitive tax is imposed.
“The New York Stock Exchange belongs in New York,” NYSE President Stacey Cunningham writes in a new Wall Street Journal Op-Ed. “If Albany lawmakers get their way, however, the center of the global financial industry may need to find a new home.
“Financial transaction taxes have a dismal track record,” Cunningham writes. “They never live up to the promises about how much revenue they’ll raise. They damage capital markets and destroy high-paying jobs.”
This isn’t an idle threat or speculation. In fact, punitive taxes on financial transactions have often triggered exactly this result in the past.
For example, Sweden implemented one in the 1980s. In response, 60 percent of trades in the most-traded stocks moved to London instead. And because of second-order reductions in revenue from other taxes like capital gains tax, the tax ended up producing almost no net revenue.
There’s no reason to think New York’s situation would be any different. Indeed, in a similar situation, NASDAQ is already discussing relocation with Texas officials.
If it left in response to the tax, most of the projected revenue would never materialize. Much more importantly, New York’s economy would suffer. The state’s financial sector directly employs 182,000 people with an average income of $400,000, many of whom would lose work or relocate with the Exchange. This wealth exiting the state would indirectly hurt millions more New Yorkers who would lose customers and investors in their communities.
The Big Picture: Government Meddling Often Backfires Big Time
If naïve New York lawmakers end up destroying one of their state’s key attractions, they will just be the latest in a long list of politicians whose legislative hubris ended up backfiring on the people it was meant to help.
“One of the great mistakes is to judge policies and programs by their intentions rather than their results,” Nobel-prize-winning economist Milton Friedman famously quipped.
We’ve already witnessed in recent years an exodus of wealth and business from New York in response to overzealous tax-and-spend policies. Indeed, major companies like Goldman Sachs are considering leaving the state, with New York lawmakers literally reduced to going on television and begging them to stay. In all, the mass exodus from New York has resulted in $34 billion in income leaving the state just in 2020. Governor Andrew Cuomo has actually resorted to calling up wealthy New Yorkers and offering to cook for them and buy them drinks if they return.
Why does this dynamic so often play out when big government tries to “help” people?
“Every human action has both intended and unintended consequences,” economist Antony Davies and political scientist James Harrigan explained for FEE. “Human beings react to every rule, regulation, and order governments impose, and their reactions result in outcomes that can be quite different than the outcomes lawmakers intended.”
In this case, New York lawmakers may be misguided, but they are not ignorant. So, if Senator Salazar and her colleagues choose to overlook the historical failures of financial transaction taxes and ignore the warnings from the NYSE, they will bear full responsibility for the inevitable losses and pain that their decision inflicts on New Yorkers.
It might be good news for Texans, though.
Originally published by the Foundation for Economic Education. Republished with permission under the Creative Commons Attribution 4.0 International License.