(FORTUNE Magazine) – THE BIGGEST aftershocks of the stock market's October quake have come in the form of vehement calls for reform rumbling across the nation's financial pages. Would-be reformers are not just liberal academicians and politicians: They include CEOs and Wall Street pros. The first object of their fury, predictably enough, was program trading. But now some in the chorus are beginning to call for more radical change: They want new taxes to discourage all short-term stock trading. Slap an excise on securities transactions, they say, or a stiff tax on short-term trading profits. Supporters argue that such levies would reduce market volatility and force investors to focus on the long term, freeing corporate managers to lengthen their time horizons as well. Like defenders of program trading, opponents of the taxes are keeping a low profile for now. Many probably agree secretly with Alan C. ''Ace'' Greenberg, chief executive of Bear Stearns: ''Taxing securities trading is a loony idea, but I don't personally argue with these people. If you told me there was a 40- year-old man down the street who thought the earth was flat, I wouldn't argue with him either.'' Greenberg has a point. The evidence that trading taxes would bring back the placid markets of the 1950s is scant and dubious. It's clear, too, that there would be undesirable side effects. But Greenberg may yet find himself arguing -- on Capitol Hill. The call for a new tax from influential executives comes just as Congress begins to search for more than $30 billion in additional revenues or cuts to meet next year's deficit-trimming target. By proponents' reckoning, taxes on trading could easily raise $10 billion to $20 billion a year. That's plenty to make trading taxes what Washingtonians call an emerging issue. Three kinds of taxes have been proposed. One, introduced in the Senate by Kansas Republican Nancy L. Kassebaum as ''The Excessive Churning and Speculation Act of 1989,'' would tax short-term profits of pension funds -- 10% on gains realized after holding the securities 30 days or less; 5% on securities held no more than 180 days. Another proposal is for a steeply graduated capital gains tax, with punitive rates for profits realized on short-term trades, tapering off to zero on investments held for several years. The tax could be extended to cover pension funds, the biggest single pool of money now exempt from income taxes. The funds are a target for market reformers because many of their managers are among the nation's most active short-term traders. These two approaches share a major flaw. Since they would tax long-term profits at a lower rate, they invite the kind of gimmickry common in the bad old days of tax shelters. The simplest gimmick, as most investors recall, is the ''short against the box.'' Say the price of X Corp. zooms from $20 to $30 the week after a trader buys 10,000 shares. He wants to sell, but a lower tax rate applies if the stock is held for a month. To lock in his gain, the trader merely borrows another 10,000 shares and sells them for $300,000. If the stock's price falls back to $20 by the time the tax rate drops, the trader still makes his $100,000 (less transaction costs) by paying off the stock loan with his original shares. Thus, neither tax is likely to decrease trading or raise much revenue. Merton H. Miller, a professor of finance at the University of Chicago, dismisses the Kassebaum tax as ''Kansas shaking its fist at Wall Street.'' Any move to tax pension funds would have far-reaching implications for retirement financing as well. Pension money ultimately is taxed when paid to retirees. Taxes aimed at pension fund profits would either reduce the benefits paid out or raise the costs to the companies that sponsor the plans. The third type of levy, an excise tax on securities transactions, is the most powerful, both as a concept and as a source of revenue. British economist John Maynard Keynes suggested such a cure for Wall Street's speculative excesses in 1936, and half a century later the idea is gaining support. The transaction tax has appeared on lists of ''possible options to increase revenues'' assembled in recent years by tax-writing committees in Congress. A tax of 0.5% of the value of the transaction would raise about $10 billion a year, according to their estimates. PROBABLY the leading intellectual force behind the idea today is Harvard economist Lawrence H. Summers, former economic adviser to Michael Dukakis and a bright light among neo-Keynesian economists. But the idea is catching on beyond academe. Says James Coxon, head of equity trading and research at Cigna: ''There is a groundswell for a trading tax -- a great body of support in investment circles.'' What has given its proponents' arguments oomph in the aftermath of October 13 is the notion that taxes could lower market volatility. But how important is that, really? Depending on the definition used, some studies suggest that volatility has increased moderately in recent years; others find it unchanged. What can be proved is that volatility rises in crashes and recedes during booms. And would a trading tax lessen volatility anyway? One reason for skepticism is that other nations, notably Britain, have long had trading taxes. Markets there are just as volatile as in America. Says Robert Shiller, a Yale economist who studies investor psychology during periods of market stress: ''These crashes are what people want to stop, and they are not going to be stopped by a tax on trading.''

Even iffier is the claim that taxes on trading would lengthen the time horizons of investors and corporate managers. Chrysler CEO Lee Iacocca, for one, has used this argument in calling for a stiff tax on short-term gains and for levies on pension funds. Says Iacocca: ''More companies would be building research and development centers if they didn't pay a penalty in their stock price for investing in long-term assets.'' Despite its widespread acceptance in American executive suites, many stock analysts and economists find little evidence to support Iacocca's contention. The skeptics point to the strong stock performance of some companies that do invest for the long term, such as Coca-Cola and Disney (FORTUNE, November 21, 1988).

The threat of hostile takeovers is probably a greater cause of corporate nearsightedness, since it leads managers to avoid actions they think might ( lower their company's stock price. But the major reason U.S. executives shrink from investing for the long haul is probably high real interest rates. Says the University of Chicago's Miller: ''When government bonds were selling to yield 4% and when inflation was running at no more than 1% to 2% a year, planning horizons of 20 to 30 years made perfect sense. Today they don't.'' The likely drawbacks of a trading tax are more concrete. Any tax that discourages trading will reduce market liquidity. The less liquid a security, the higher the return investors will demand for holding it -- or conversely, the cheaper it must be for them to buy it. The higher returns a trading tax necessitates would boost the cost of capital for U.S. businesses even further. THE IMMEDIATE effect of a tax would be to drive the market down. Yakov Amihud of New York University and Haim Mendelson of Stanford have been studying the impact of transaction costs on stock returns for several years. ''Specifically,'' they write, ''we expect a 0.5% tax on the sale of stocks to reduce the market value of the average New York Stock Exchange stock by approximately 5%.'' Alas, the finer points of finance get short shrift in Washington, while the need to raise revenue will rivet attention in the coming year. Some backers of a trading tax, such as Cigna's Coxon, who thinks ''black-hole volatility'' is driving people away from the stock market, would support the new levy only if the revenues raised were offset by a reduction of the double taxation of dividends. But many advocates see the tax as the least of several revenue- raising evils. All taxes bite into someone's wallet, goes the argument, and most discourage either work or savings. Why not pick one that proponents contend would benefit the stock market and encourage long-term investment? Says Pat Choate, a TRW vice president in charge of the company's office of policy analysis and a Washington idea broker: ''One of these measures stands a good chance of becoming law next year. Call it the speculators' tax, and you've got it. You never go wrong kicking Wall Street.'' Despite a few conspicuous exceptions like Iacocca, the business lobby would mostly close ranks against a tax on pension funds. Labor unions, with pension funds of their own, might well join the battle. The securities industry lobbied successfully against the transaction tax when it first surfaced two years ago and would fight again. But tax-minded Congressmen in the cash-hungry ; atmosphere of Washington, circa 1990, face a delicious prospect: Not quite knowing what they are getting into, some fat sheep are asking to be shorn.