Securities Taxes Congress has proposed a new tax on any transactions of securities traded on Wall Street. How would this destroy wealth?
In order for both the buyer and seller to benefit from a transaction the bid price the buyer is willing to pay must exceed the ask price the seller is willing to accept. With the new tax, this spread between bid and ask must be large enough to also cover the new transactions tax. This means that potential transactions in which the bid-ask spread is positive but not larger than the tax will not be consummated. Thus, the tax prevents an asset from moving to a higher valued use. [Note: Congressional spending requires the imposition of taxes. On balance, this could increase wealth if society values government services by more than the tax revenue collected plus the loss due to these unconsummated transactions.]
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