Healthy financial markets allocate capital to vital, long-term value creation; unhealthy ones foster unproductive speculation and market churn. Good financial regulation and tax policy can tell the difference. Unfortunately, in the United States, productive business investment has been in long-term decline and the financial industry now specializes in trading assets around in circles. A prime example is the explosion of high-frequency trading, in which enormous volumes of trades occur in fractions of a second, not for purposes of generating value, but to capture profit at someone else’s expense. High-frequency trading now accounts for the majority of trading volume yet accomplishes little beyond diverting capital and talent from more productive pursuits.

Congress should establish a financial transaction tax (FTT) of 10 basis points on secondary-market sales of stocks, bonds, and derivatives. Most of the world’s largest financial centers, including London, Hong Kong, and Shanghai have this kind of tax, which targets unproductive and speculative transactions and can lower costs for long-term investors by reducing excessive churn and encouraging a return to low-turnover, lower-cost strategies. According to the Congressional Budget Office, such a tax would raise more than $750 billion over ten years. This revenue could in turn be used to reduce the tax burden on productive investment—for instance, by making full expensing for capital investment permanent, canceling the requirement that research and development costs be amortized over at least five years, or creating a new a new category of very-long-term capital investment taxed at a very low top rate.