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A Small Victory (Finally)

January 14, 2002

The Section 31(a) tax, the little-known stock transaction fee that evolved into another tax for the federal government while arrogating billions of dollars from the pockets of investors, is finally going to be reformed.

Congress recently gave final approval to the "Investors and Capital Markets Fee Relief Act" (HR 1088), which President Bush is expected to sign. The Section 31(a) fee/tax is another case of how government inexorably grows, often without design, with many lawmakers conniving in the expansion while telling constituents they're against "big government."

Section 31(a), a part of the securities laws that came out of the Great Depression, was originally designed only to fund the budget of the Securities and Exchange Commission. But in the mid-1990s, it began to take in billions more each year than was needed to pay for regulators. For instance, recently the securities industry estimated the Section 31(a) fee cum tax generated $2.7 billion, while the SEC's budget came to $377 million. The difference of some $2.3 billion was a nice little stash for piggy lawmakers who love to spend your money and who live in fear that there might be a little less next year. (See Senator Tom Daschle's latest comments on the tax cut, which leads one to believe lower rates are the equivalent of the end of the world.)

The securities industry, spending millions of dollars on lobbying, geared up and waged a public campaign to reform the tax over the last five years. They made the case to investors that they were rooked.

The Clinton administration and the previous Congresses were in no hurry to stop this kind of chicanery. Finally, over the last year, the securities industry's campaign was successful. Recently, even many liberal Democrats decided the game was up. But what a wonderful game it was for the fat cats, big spenders and Potomac wire-pullers!

Indeed, even one lawmaker who sponsored the legislation to reform the Section 31(a), New York Senator Charles Schumer, conceded during the debate, "I might like to see what the SEC could do with a budget of $2.3 billion." He also said the overflow could be used for more government roads and schools.

Indeed, I can see our great tribune Schumer salivating right now at the prospect of spending more and more money. But HR 1088, which our Potomac Plato must have reluctantly voted for, is designed to adjust the stock transaction fee to bring it in line with the SEC budget.

The lesson of Section 31(a) is that even the reform of the smallest, most inconsequential part of our out-of-control government--even one that almost everyone agrees is unauthorized and wasteful--requires a huge effort that usually doesn't succeed. And as for reform of anything of consequence, well, check your skyrocketing payroll tax rates. It is a familiar scenario.

The bipartisan expansion of government continues. The bureaucracy goes on. The tax continues to be collected. The Republicans act like Democrats. The Democrats act like Republicans. Everyone--rich, poor, and middle-class--pays through the nose.

Any logical person might think that all one would have to do would be to point out this wrongful appropriation of funds to end the Section 31(a) flimflammery. However, if one thought that logic, not politics, prevailed in Washington, one would not be living in the United States of 2002.

This is a place in which the worship of big government is practiced by both major parties, by every special interest group under the sun, and by most media outlets, most of whose members have close relationships with members of Congress.

Section 31(a), the reformers now promise, will stop being a backdoor tax and become what it was designed to be in the first place--a stock transaction fee designed to fund the SEC staff and that's it.  Even in this small triumph for the average person--one estimate is that investor will save about $1,000 a year--one is reminded of how we arrived at the era of big government and why it is well nigh impossible to roll it back.

In Before the Fall, a book on the Nixon administration by William Safire, a story is told of a lousy little tea-tasting board that dated back to 1897. It was a superfluous board that ate up $125,000 a year but provided a few political sinecures for a few trusty foot soldiers of the major political parties.

Nixon, at the height of his political power before Watergate, was not able to gut the Board of Tea-Tasters, Safire reported. The tea board, like the Section 31(a) tax taking in more money than was needed, found some friends and continued to operate, even as Nixon planned its demise.

"Enter some friendly Congressmen, solicitous of the views of some important tea importers, to point out that the board served a useful function in maintaining the quality of imported tea," Safire wrote. Of course, this argument was drivel, Safire said. So were the arguments of those who said the excess money from Section 31(a) would do a lot of good--that the money would build roads and schools (as if taxpayers weren't already paying tons of money for those things).

So Nixon lost. The tea board went on, as did the unauthorized use of Section 31(a) taxes, because the nature of government---regardless of whether it is run by Republicans or Democrats or Conservatives or Socialists---is to always take in more money, spend more money, and raise taxes, even though the latter is often done in backdoor methods that most people don't recognize (e.g., raising the threshold tax on Social Security each year, increasing "user fees," hiking the tolls on your government roads, Section 31(a) ad nauseam. How many average people even recognize this skullduggery?).

In most cases, it is difficult to rein in a government's spending and taxing. It is the nature of government to expand its functions and imposts, even if there is no mandate to do it. This is the nature of democracy today, tomorrow, and yesterday.

The brilliant British observer Walter Bagehot once wrote of Parliament almost 150 years ago, "The members who are for expenditure always come down; perhaps a constituent or a friend will profit by the outlay. the members against the expenditure rarely come down of themselves; why should they become unpopular without reason?" (The English Constitution, p. 75).

The lesson of the Section 31(a) campaign is that rolling back a tax or a bureaucracy--especially a public one with taxing power--is damned difficult. It requires a concerted effort. Any tax or office--no matter how ridiculous or cumbersome--will always find pals in Congress. The onus is always on the revolutionaries who want the government to do less and tax less. As Jefferson said, a little revolution is a good thing now and then.

Gregory Bresiger is a writer and editor in New York. His work has appeared in Traders Magazine, The New York Post and The Journal of Libertarian Studies.  See his Mises.org Articles Archive, and send him MAIL.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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