Market Bubbles and Wasteful Avoidance: Tax and Regulatory Constraints on Short Sales

In this study, Professor Martin Shubik and co-authors, Michael Powers and David Schizer, discuss the peculiar dysfunctional aspects of the U.S. tax law which treats a long-term gain from a short position as though it were a short term capital gain. They consider whether this is a sin tax against the evils of short selling or merely a misunderstanding by the law of what constitutes the operational meaning of an economic transaction. The questions concerning the stabilizing or destabilizing aspects of short selling are considered. They conclude that the non-symmetric treatment of taxation between long and short positions for investments over a one year duration is undesirable from the viewpoint of market efficiency.