We learn from history that we do not learn from history

Many people might have missed it, but between 1905 and 1981 the New York state imposed a Security Transfer Tax. The tax was based on the par value (aka stated value, or face value) of stocks traded, transferred or delivered in New York State. It was not implemented as a financial stability measure, but as a revenue generator to fund the state deficit.

Following the 1932 and 1966 increases in this tax, the NYSE began lobbying New York State to reduce the rate stating that it put them at a competitive disadvantage relative to out-of-state exchanges. As it had done in the past, the NYSE threatened to move out of New York to avoid the tax. Bowing to pressure from the NYSE, in 1968, an amendment was introduced that gradually reduced the tax imposed on non-residents until, on 1st July 1973, it was reduced by 50%. The tax was finally scrapped altogether in October 1981.

A recent study by Anna Pomeranets and Daniel Weaver analyses that particular period and finds some interesting points for discussion today. Firstly, in an effort to avoid the tax, firms began reducing their par values. Thus, by March of 1933, 200 listed firms had reduced their par values to between $1 and $10 thereby greatly reducing the impact of the tax. Secondly, the authors show that an increase in transaction tax was related to an increase in individual stock volatility, bid-ask spreads and the price impact of trades. Put simply, the tax harmed market quality.

Considering that European financial markets are already under massive pressure, who still thinks that imposing a European Financial Transaction Tax is a good idea?

Let’s see if Georg Wilhelm Friedrich Hegel is still right with his assertion that “we learn from history that we do not learn from history.”

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