Many Americans assume that a booming stock market means good economic times for everyone. But some important facts have been lost in the hoopla.
- Most working families actually own little or no stock and therefore receive few benefits as stock prices climb. Most gains go to a narrow, wealthy segment of the population. See Chart.
- The 1990s rise in stock prices has been driven by a rapid increase in corporate profits. The rise in profits is due, in part, to the squeeze on workers’ wages, laying off large number of employees through downsizing, and reducing long-term investments.
- There is good evidence that speculation in the U.S. stock market is widespread and stocks are over-priced. Speculation occurs when buyers purchase stock to make money off a short-term (even over just a few hours) rise in the stock price. It can drive up stock prices to excessively high levels. These prices are unstable and can lead to a stock market downturn that might even affect the rest of the economy.
- New measures are needed to discourage speculation and encourage long-term investing.
- A Securities Transaction Tax is a fee levied on stock purchases. The fee on stocks held for a long period would be quite small while the fee on short-term purchases would be larger.
- A Variable Capital Gains Tax would tax the financial gains from stock and other assets held for just a short time at a higher rate than gains from stock held for a longer time.
Since the wealthy own most stock and other assets, they would also pay most of these taxes.
- No one knows the future – whether the current very high stock prices will lead to a sharp downturn in the stock market or how such a downturn would affect the rest of the economy. But stock market speculation is always risky. Measures to dampen speculation – such as a securities transaction tax or a variable capital gains tax – should be used to protect the U.S. economy.