Tax Analysts Blog

The (Mis)Usable Past of the Stock Transaction Tax

Posted on Jan 26, 2010

In a recent item for ChamberPost, Tom Quaadman makes this observation about the stock transaction tax:

    Ironically, in 1932 President Hoover had Congress pass a dramatic increase to the then existing stock transaction tax to stop what he thought was needless speculation. The result- 60 days after the increase was enacted the stock market hit its low for the Great Depression and two years later the Treasury Department issued a study stating that the tax failed to end speculation or raise much revenue.
It's all well and good to use history to buttress contemporary policy arguments, but let's get the history right, why don't we?

First, let's dispense with the notion that the 1932 tax increase was responsible for the Depression stock swoon. The law didn't pass until June 6 of that year, by which point the Dow Jones Industrial Average had been falling for more that two years. In fact, it had already plummeted from it's pre-Depression high of 381.17 in September 1929 to just 49.32 on the day President Hoover signed the legislation. Over the next month, it continued to fall, reaching a Depression low of 41.22 on July 8.

So by all means, let's blame those last 8 points on the tax law. But responsibility for the other 331.85? Better look elsewhere.

Second, the 1934 study to which Quaadman is presumably referring (this one) suggested that the real problem with the transaction tax was that it was too light, not too onerous.
    Except as a check on speculative activity the tax probably has little to justify it. At present rates it probably does not check the kind of speculative activity -- the reckless, foolish activity -- deplored by those who would like to use the tax for this end. It cannot therefore be up-held -- again, at present rates -- on these grounds.
In other words, the tax might have worked, if only it had been steeper.

New Deal Treasury experts were never great fans of the stock transaction tax. But neither did they disdain it. Rather, they considered it a flawed but largely innocuous element of the tax system. "It has few positive disadvantages," they concluded in 1937, "and it would be helpful in yielding revenue in case of a sharp rise in the price level."

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