Reps. Peter DeFazio, D-Ore., and Ed Perlmutter, D-Colo., are drafting a bill that would slap a 0.25 percent tax on the sale and purchase of financial instruments such as stocks and securities. They estimate it would add about $150 billion a year to the Treasury. They call this crazy idea the “Let Wall Street Pay for the Restoration of Main Street Act of 2009.”
In the Democrats’ world, Wall Street financiers exist in a bubble, where their considerable assets never escape to circulate in the broader economy. In reality, Wall Street props up Main Street every day by allowing investors to back promising ventures and well-run companies — voluntarily.
Such a tax would deter speculators who produce nothing of social value. With such a tax in place years ago, we would not have the current mess.
Speculators often make transactions within a day – not to produce goods to consume, or even sell to a broad market – but simply to make money. It’s a bet rather than an investment.
It would help reduce the deficit (where are the deficit hawks when you need them?), and alter socially and economically damaging behavior.
Long-term investors won’t be hurt by modern versions of the Tobin Tax. Who will be hurt? people who are seduced by the idea of quick profits, without work. Greedy people.
#1 is completely off base.
These taxes would not have deterred the current financial malaise, which was caused by the subprime mortgage fiasco and enabled through bad government policies, poor regulation, and consumers who believed they were better off than they actually were.
Everyone loses with this tax.
First it reduces liquidity, causing higher bid/ask price spreads throughout the market, meaning everyone will pay higher prices overall. This also means a less liquid market for “long term investors.”
Second, it increases costs for everyone, since it is a tax on every stock transaction, regardless of whether it is a gain or a loss. Thus returns for all go down and costs for all go up–pension funds, individual investors, mutual funds, etc.
Third, it will actually not raise money for the government, when it is considered in terms of its larger impact on the market: jobs lost, discount brokers hit, small businesses impacted, websites which will be caused to go out of business, money moving to other markets, and on and on.
Lastly, it is a poor example of shooting at everything to hit a few targets. People are after “Wall Street” but what they really mean is the perpetrators of the current fiasco, which translates into only a few participants in the financial industry. But this chosen amunition showers bullets on all market participants.
Are these legislators not aware how this would hurt the middle class? Millions would suffer every time they sought to change their investments in their 401(k)s, 403(b)s, IRAs, Roth IRAs, 529s, and pension plan accounts – not to mention their non-retirement investment savings. That would be in addition to the harm described by okifan 18.
Please Kendall, let’s put this one to rest. Not even Chuck Schumer thinks it’s a good idea so I can’t see this getting any traction in the Senate and maybe not even in the House either.
Chris in #4, I would love to, and you are certainly right about Schumer. The difficulty is this has gone from being on the very fringes to slightly inside the outer edge. If you know anything about history and legislation, this is how these things get started. And when they do there are a whole lot of people that underestimate the significance of the movement that’s taking place.
This is a bad idea. Right now, it stands little chance. HOWEVER, it is easily possible to see the pieces aligning on the chess board in such a way that it soon begins to have much more of a chance. This is especially the case because of a wave of populism and faux-populism in the country which is understandable but at the same time potentially dangerous unless properly channeled.
What is needed, therefore, is vigilance and pro-activity. And it is needed now.
This new tax would convince me to call it quits in equity trading altogether. My 401k is already the tank, and other retirement funds which all the “experts” said should be invested in stocks will take about 10 years past my end-of-life-expectancy to recover to their original value the way the market is going currently.
With all the taxes and fees I have to pay on accounts (which, Mr. Wilkins, I hold long-term) it’s no longer practical to invest anything in corporate America. The .23% sure-thing I can get on CD’s is a much better deal (what wry and awful words those are!) – although with my credit card interest rates now averaging 27.21%, I wish I could somehow invest in credit card debt…….
And when ordinary investors pull out of the stock market, the results can’t help but be dramatic. After all – who owns most of the stock, in one form or another? Between pension funds, investment funds, 401k’s, etc, there’s a LOT of stock ownership that has nothing to do with speculation – but which will suffer from any new taxes, and whose withdrawal from equities would wipe out Wall Street.
Most people do not have an idea of the real impact of this tax. Its proponents say that it’s “small” but it isn’t, just as a tax on any can of soda isn’t small for someone who is an avid soda drinker. It adds up fast.
Consider the case of Google, for example. Suppose that you were fortunate enough to be able to purchase 100 shares of GOOG which you intended to hold for a year. At Friday’s closing price of 579.76 that means a total cost of 57,960 dollars. The transaction tax is .0025% of the total transaction. That comes to $1449.40 for your buy of GOOG. Then, of course, when you sell it you get charged the $1449.40 again. Suppose you are fortunate to have commissions of, say, 10 dollars on these two trades.
Total cost? $2898.80. For most people I know that is real money. By the way, look at what happens if you want to hold such a stock and try to make a gain over the course of, say, a year. This “little tax” costs you more than five percent before you start. So you need to make at least 5% (29 1/4 points!) in order to have a gain at all in GOOG, one of the most popular stocks out there at the present time.
Also note: anyone who held GOOG for a year and made, say, 20 points, would still pay the transaction tax, but of course whereas NOW they would pay a capital gains tax, if the transaction tax were in place the government would get no capital gains tax at all, in fact, this person would under the new scheme have a capital loss. The loss in capital gains tax has to be taken into account before anyone can get serious about the revneue “gains” they claim this tax would produce, never mind all the other losses involved.
.25% of $57,976 is only $144.77 not $1,447.40. Although I am instinctively anti-tax, I can see the benefit in the theory behind this. The amount made in one day is very limited, and investing in a company for one day does the company no good (that I can think of). If a tax is added, then it reduces the odds on the bet and encourages holdout out for larger gains, which would be impacted less. I’m not sure I would agree to this, but couple it with a lower capital gains tax, and it would peak my interest. May be a sliding scale based on how long the stock is held. Something like:
Less than a day .25%
Less than 30 days .20%
Less than 90 days .15%
Less than a year .05%
Over a year 0% – and reduced capital gains tax.
This would encourage long term investing and help those who held their stocks longer.
# 8 is correct by my calculations, the tax on GOOG mentioned in #7 would be 144.90 roughly for one investment decision. Then another 144.90 for another, not including commissions.
So the cost of investing in GOOG for this person has gone from 20 dollars (two commissions) to 289.80 dollars+20 dollars=a 154.9% increase in cost ($309.20). Similar calculations would also result for other more expensive stocks like GOOG, meaning the liquidity in those stocks would definitely fall. This will lead to increased bid/ask spreads as number 2 mentions above.
Where does this tax money go?? That is always what gets to me. So we want to ensure some type of social engineering, according to #8, to increase long-term investing (why? just because we think that’s better). So we all pay additional taxes on our transactions – in other words, it’s all the government’s money except for what they allow us to keep. And this new tax money goes where? For what? Used how? More retirement perks for congresspeople? More health care selections for government employees? More Medicare fraud payments? Who in their right mind thinks that the government will spend this money more responsibly than private citizens? Or are we saying it doesn’t matter where the tax money goes, it’s the social engineering that’s important, and the fact that much of this tax money may be wasted on ineffective programs is beside the point.
I think that John’s comments in #1 represent the thinking of the Representatives sponsoring this legislation. This legislation is as much oriented towards social engineering based on their social values as it is for raising revenue.
Based on research I have done via the Internet, other countries in the world are moving away from such taxes. The trading of financial instruments today is quite different than when these taxes were first imposed. Trading can be moved to other countries and capital can be raised on foreign exchanges rather than in the local country. There are studies that already show such things happening. The so called Tobin taxes or stamp duties represent one of the largest costs of trading in today’s computer enabled, online trading systems provided by every major broker to retail and institutional customers. In fact, in today’s trading environment, the knowledgeable retail trader can compete quite effectively against the large institutional traders.
I would point out that trading activities provide liquidity to markets and also provide efficient price discovery; i.e., you very quickly determine what the market thinks the “fair” price is. Also, while active traders are placing bets on the movement of prices, they are putting their own capital at risk with these bets. If they bet right, they pay income taxes on the gain.
What we might want to do is to look at the so called private derivatives market that operates between large institutional traders and banks, requiring open disclosure of such transactions and also preventing abusive transactions such as naked shorting of stocks where you sell short shares before you ever have borrowed them to sell and then buy them back when the price drops on the same day. These types of transactions can artificially drive down the price of a stock and actually are already banned. We just do an imperfect job of policing them.
Finally, if I am a successful/profitable active trader, I will pay a significant amount of taxes on my profits, I likely will organize my business as a corporation, hiring myself and one or two other persons. I will pay Social Security and Medicare tax on the salaries, buy office supplies in my local community, pay commissions to my broker who hires people to serve my trading needs, etc. I don’t understand why this is greedy and a of no social value. By the way, when properly done, active trading such as this is not an easy way to profits, it takes a lot of hard work, evening hours preparing for the next day’s trades, and is most definitely not a way to quick or easy profits.
If someone bought 100 shares of GOOG one year ago, it would have cost about $29,296.00. If the transaction had been taxed at 0.25%, the tax would have been $73.24. Assuming a $20.00 brokerage fee, the cost of the transaction would have been $93.24.
So he would have cleared $24,726.82 or 86% after all taxes and fees had been paid. Not bad.
Of course, very few stocks gaind 97.76% over a one year period.
If that person sold those 100 shares Friday, he would have grossed $57,976.00. The 0.25% tax on the transaction would be $144.94. Assuming the $20.00 brokerage fee, the cost of selling would be $164.94. Since the stock had been held a year, he would pay a capital gains tax (instead of personal income tax) of 15% or $4,302.00.
#11 – Daniel – what are you making? What are you trading? Guns for butter? Shoes for beer? My bias is toward producers rather than traders, who benefit from other people’s productivity.
It seems like betting to me. You hire people to help you make better bets. Of course, it is very hard work to play the game. There is no denying that. Gravediggers, soldiers and professional chefs work equally hard, and make far less.
A
After reading the comments here and thinking about it more, it seems the bottom line is if the government makes it hard on business, business will go elsewhere. The reason the US has been as prosperous as it has, it because it was friendly to business (low taxes and limited regulation). Companies will move some or all of their operations overseas if we keep making it hard to do business here.
John #11 – You ask a fair question. When I trade derivatives (options and financial index futures) or stocks I provide liquidity and price discovery to the market. This provides a lower cost of raising capital to companies that raise capital through the equities markets. This is cited in a report by Oxera, a British economics consulting group. The Oxera report, and others, also cite evidence that so called trader taxes, can actually result in lower revenue by causing the price of equities to fall, and driving trading volume off-shore.
Since options and futures trading are a zero sum game, there is a loser for every winner. If I trade a derivative without owning the underlying instrument, I am making an informed decision as to what I think the actual price should be, and if I am right I make a profit. If I am wrong, I lose. I do not consider this betting, because I only trade when I judge the probability of a successful trade to be heavily in my favor.
On the other hand, if I own an underlying instrument, I will purchase/sell options or financial index futures to hedge my instrument against loss or to enhance its return to me.
I propose that speculation, when it is properly regulated so the small, individual trader has a level playing field with the Goldman-Sachs of the world, is not an inherently evil, socially useless activity. If we are entitled to the fruits of our labors, we should be as free to lose them or earn a profit as anybody else.
If we were to try and tax all activities people considered socially useless, I would propose a heavy tax on video games and rap music. 🙂
This may be off-topic, but one of my concerns about taxation in the U.S. is that less and less of the population actually ends up paying any income tax at all, after all deductions and credits. This means that an increasing proportion of the population is thinking that it does not need to contribute anything to the government while expecting to reap all sorts of financial programs/payments by merely voting for the candidate that tells them they will deliver all that these folks “deserve” to get from the evil rich people that the government will separate from their supposedly ill-gotten gains.
[blockquote]If I trade a derivative without owning the underlying instrument[/blockquote].
There is a bridge I’d like to sell to you.
[blockquote] I am making an informed decision as to what I think the actual price should be, and if I am right I make a profit. If I am wrong, I lose.[/blockquote]
The same can be said of a serious poker player or betting on any sort of competition, be it a horse race, a football game or an election outcome.
[blockquote]If we are entitled to the fruits of our labors, we should be as free to lose them or earn a profit as anybody else.[/blockquote]
The same can be said of gambling, engaging prostitutes, and conspicuous consumption.
[blockquote]If we were to try and tax all activities people considered socially useless, I would propose a heavy tax on video games and rap music.[/blockquote]
I think the point is that market speculation is worse than “socially useless” but rather is “socially harmful” as the recent collapse of the financial system, millions of unemployed, millions evicted from their homes, huge increases in the cost of unemployment and welfare, and the lost revenue of both business and government that resulted.
And contrary to your claim that this activity lowers prices there is much evidence to support the argument that futures speculation in energy drove oil up to $150/barrel and flipping drove up the cost of housing–both contributing to the recent financial collapse. It was, after all, derivatives trading that brought down the banks.
The other question is whether or not the public should be required to pay for your loses and those of other speculators. A very significant part of the recently acquired national debt was to bail out speculators when their bubble burst. And those of us who regularly invest for the long term ended up paying a price when the bubble burst. And conservative pension funds that were not speculating also suffered huge loses.