The financial services industry generally does not like the idea of taxing financial market transactions, like that proposed this week by Democrat Senator Brian Schatz of Hawaii in the aptly named Wall Street Tax Act of 2019. Perhaps the concern is that it would reduce “market liquidity” and harm the economy. These concerns are misplaced.
In a bull market there is plenty of liquidity. It is easy to buy and sell a lot of stocks and bonds when folks are optimistic and prices are rising. In a crisis, however, it becomes very difficult to trade. The observed changes in “liquidity conditions” in these two types of market environments have nothing to do with transactions costs and everything to do with the fear of losing money when prices are falling.
