The Unintended Consequences of Levying a .25% Stock Transaction Tax

Congress is considering legislation to impose a securities transaction tax of 0.25% on every stock trade, which of course is equivalent to 0.5% for each round trip. It’s known as H.R. 1068: Let Wall Street Pay for Wall Street’s Bailout Act of 2009.

As currently written, the bill amends the Internal Revenue Code of 1986 to impose a tax on certain securities transactions. The authors presume it will produce enough additional revenue over time to recover the cost of the $700 billion Troubled Asset Relief Program. Representative Peter DeFazio, D-Oregon, authored the bill.

This bill takes the “law of unintended consequences” to new extremes. You and I did not create the problems of Wall Street. You and I did not receive any Bailout Dollars. As taxpayers, you and I are already paying for the TARP. To start charging us 0.5% for each round trip trade is only adding insult to injury.

If you have portfolio turnover of 100% per year, then this tax represents a 0.5% per year burden. If you are a more active trader, perhaps with an average holding time of 25 days, then it robs you of 5% per year. If you do multiple trades a day, then forget it - you are out of business.

If active traders are removed from the market, what happens to volume? It will dry up, of course. Then you and I will be paying more for each transaction in the form of an increased bid/ask spread. The bill claims to recoup the cost of TARP, but I bet they did not factor in the severe volume reduction that the bill would create.

This proposal has a host of other problems, many of which are highlighted in a great article by James Ramage for Traders Magazine entitled Industry Fears Proposal in Congress Would Destroy High-Frequency Trading and Liquidity.

This bill will hurt too many people, and they won’t be the people it is intended to hurt. A ground-swell of opposition is already forming, but with the public’s current anti-Wall Street mood H.R. 1068 could still slip through. If you see the folly of this idea, let your Representative know how you feel.

Comments

[Consider_this:]

Revival to Warran Buffet's "buy and hold"?

I remember that Buffet said that he's fine if Wall Street is open only 1 day a year to do trades, as an illustration of how he don't believe in trading.

I wonder if this Bill is actually originated by WB.

Personally, reduction in liquidity would be a problem, and a large B/A is definitely problematic -- but similarly I hate shows like CNBC that tries to make people trade every second, etc.

I don't know, there much be a balance. We're *way too* stock centric and short term focused. It's like people don't want to work hard and accumulate weath slowly, but want to all time and jump. We need to put our focus back on Working and Producing, not speculating.

However, even with that viewpoint, I think this bill doesn't sound like a good way to do that. It's too lopsided, because over time, eventually the whole stock market's wealth will be swallowed up by the govt. That's way too much.

Feb 26 12:48 PM

[GeminiAtlas:]

These guys in congress sure can think things through, now can't they?
Are they thinking of all the mutual funds, pension plans, etc who have to actively manage their portfolios? And the folks those funds represent?
They want the markets to go back up, right? Less trading will make things "murkier" as price discovery works better with more trading, in my current understanding, tell me if I am wrong. Less trading will make the markets more "clunkier" if that is a technical term.

Feb 26 12:49 PM

[boats.j:]

These Bankster types and their hucksters won't be satisfied until everyone borrows as much as they can and sends the proceeds along with their cash, gold, houses, cars and jewelry to them.

Anything short of EVERYTHING isn't enough for these scumbags!

Feb 26 12:56 PM

[longoil:]

If you look at the typical mutual fund, this will decrease the yearly return by up to 5% per cent. It doesn't seem to bad at first.

Now compound this over 10 years and the government will have stolen 40% from you. Over twenty years, the government will have taken 65% from you in the seemingly trivial 0.25% tax.

Feb 26 12:57 PM

[hoover:]

Ron, I respectfully disagree. First, let me say that stock trades are already down 60 to 80% using online trading, versus the older phone-call-to-your broker trades 20 years or so ago. So, a quarter of a percent on, say, a $10,000 trade, would be $25. That won't kill anyone. Of course on 10 million dollar trades it would cost $25,000 if there is no cut-off point. So, those with $10 million to trade will just have to pay. The tax will also discourage excessive trading which would likely be a good thing since too much speculation is what often brings markets down. While, I don't like taxes, someone always gets hit when new taxes are sought. And, this time around the haves, rather than the have nots, will have to pay more.

Feb 26 12:58 PM

[klarsolo:]

I you want Wall Street to pay for its bailout, why don't you just increase the captial gains tax by 1 % or so? Wouldn't that be much more fair than a transaction tax that will have all kinds of unintended consequences?

Also, does this mean that once all the bailout money is paid back, this tax would be revoked again? Probably not.

Feb 26 01:01 PM

[hoover:]

Thanks for the comment, but I not sure that mutual funds really need to trade as much as they do. Some financial experts suggest they are churning stocks, receiving some form of gratuity from brokerages for their excessive trading. Look at how many of the funds do worse than the Dow or S&P averages (a shorter list is those that do better that the averages). ETF's don't trade much except when they initially buy or change their index. They seem to do as well as the mutual funds although that would be strongly debated by mutual funds. Just some thoughts.

On Feb 26 12:49 PM GeminiAtlas wrote:

> These guys in congress sure can think things through, now can't they?
>
> Are they thinking of all the mutual funds, pension plans, etc who
> have to actively manage their portfolios? And the folks those funds
> represent?
> They want the markets to go back up, right? Less trading will make
> things "murkier" as price discovery works better with more trading,
> in my current understanding, tell me if I am wrong. Less trading
> will make the markets more "clunkier" if that is a technical term.

Feb 26 01:13 PM

[Alf Landon:]

My main concern is that there might be loopholes attached for market makers, specialists and other insiders whereby they are exempt from the rule and have the playground all to themselves. The tax is a bad idea to begin with. Strategies, however, could be implemented to trade against the new rule if it applies to everyone. If there is an exemption though, then we are looking at legalized bank robbery again.

Feb 26 01:18 PM

[Mcwop:]

Hoover, you totally miss the point. For example, people trading stocks in a discount brokerage, or investing in a mutual fund in no way caused this crisis. WHY should they pay for others follies?

Feb 26 01:36 PM

[User 316795:]

it's a bill. It will never get out of committee, let alone become law.

Feb 26 01:51 PM

[KingGeithner:]

You know how many bills are proposed per year? Congressmen routinely propose quite a few bills that they know will never even get past a committee just to have some thing tangible they can claim that they have advocated for. This bill will NEVER pass, please stop trying to stir up further hatred towards the 'all-mighty evil federal government'.

Feb 26 02:14 PM

[dick streich:]

I can't believe that congress is even considering such a bill.
They get dumber by the day.

Feb 26 02:29 PM

[Marcus Aure...:]

Titoman & similar,

Just because you think the bill has slim chance of becoming law doesn't mean we should ignore it. One reason bad bills don't become law is because people speak out against them.

Feb 26 02:40 PM

[SA Editor J...:]

I just spoke with someone my congressman's office (Elliot Engle, D-NY) and the person on the other end said the bill has no chance of even making it to a vote. That being said, when I stated my disapproval and asked what the Congressman's position would be should the bill actually make it to a vote, all I got was evasiveness on the other end. The scary thing is if this actually got to the House floor, there is enough of a populist backlash right now that I think there's a decent chance it could pass. Truly scary!

Feb 26 03:49 PM

[Marcus Aure...:]

Back in the '90s & earlier part of this decade a lot of optimism was expressed by a lot of authors I read re: our nation becoming an investor nation. Many of us are still investors but the problem is we are mostly passive about it. A portion of our paycheck goes into the our 401K plans and the more adventuresome might even purchase mutual funds outside of their 401K. However, I wonder what percentage of us actually have a clue about even basic investing.

Most people it seems take the Nikki Santoro approach to investing. They make money they don't care keep it coming! They lose money, the look to muscle someone. Even if that muscle is government muscle its still muscle. In this case they strong arm the govt, the govt then slaps the investment houses & the like, and then the investment houses just pass it right back to their customers.

Feb 26 07:51 PM

[H. T. Love:]

With Pelosi and Co. firmly in control, one should not rule out the possibility of the bill making it to the floor. Once there, with social engineering in mind, it becomes another source of revenue that appears to punish the culprits. Of course, the responsibility of the CRA (enacted by congress), failure/complicity of regulators, etc. that enabled the current carnage are now forgotten by all, thanks to the "Spin Meisters".

What this country has devolved into in one generation is disgusting. Mindless amoebas being led by the clueless to believe every lie is a truth and revisionest history doesn't exist.

HardToLove

Feb 27 11:14 AM

[GCherer:]

The 'slim to none' chance of passage is small consolation. The same transaction fee shows up again in the National Health Care Act bill (HR 676, i think). Once our elected (one must not forget) officials get this stuff seeded in their alleged brains, it is hard to stamp out, and impossible to stamp out without someone protesting.

Feb 27 01:19 PM

[fireball:]

at this point i hope my fellow investers and traders have covered their buts and gotten off the train tracks.
when you were paid your employer or business was taxed. then you were taxed for earning it. exactly how is it just to tax you for risking the fruits of your labors to be taxed again.
boats
jefferson warned us long ago not to allow a central (national) bank. what you say is what he warned of. sure could use a jackson about now.

Feb 27 03:01 PM

[KauaiMark:]

It's time to vote every Federal and State incumbent (R and D) out of office until the cancer is totally removed.

Mar 02 04:17 PM

[yellowhoard:]

Let's see, the markets are on their knees, so let's make trading more expensive. Housing is on it's knees, so let's get rid of interest deductability. Business is on it's knees, so let's vastly increase taxes on energy.

Oh, and when everyone in America drops off their keys at the bank, the government will own everything. What's that called? I forget.

Mar 15 01:08 PM