Taxing the Street

Perhaps you heard on the Marketplace Morning report this proposal to tax Wall Street transactions. The revenues would go toward deficit reduction and job creation on Main Street. I understand the motivation behind this, but there's a pretty good case against it.

The Hill reports on what Democratic sponsors are calling the "Let Wall Street Pay for the Restoration of Main Street Act of 2009." Catchy pop(ulist) title. Here's the gist:


Half of the $150 billion in tax revenue would go toward reducing the deficit, while the other half would be deposited in a "Job Creation Reserve" to support new jobs.

More from one of the bill's co-sponsors:

DeFazio notes that the United States had a similar tax from 1914 to 1966. The United Kingdom currently has one, he writes, and maintains "the highest volume exchange in Europe." He said the British experience is evidence that such a tax would not push trading overseas.

Opponents believe the bill would push trading overseas. But there are other potential pitfalls. Taxes on trades as opposed to gains hit losing transactions too. The bill "aims to exempt retirement accounts from the impact of the tax," but that sounds tricky. When a similar proposal was floated a few years ago, Matt Welch made this argument about Wall Street's activity:

Yes, it helps lucky or shrewd investors earn money (while making many of their brokers rich), but that's only one side of the equation. The other side is, companies get to raise money to finance their operations for such useful endeavors as ... hiring people...

Whether it's through a day-traded purchase of a brand new dot-com stock, or a 10-year corporate bond in GE, the capital markets allow companies to raise money that would otherwise not be available.

So, it's possible a transaction tax might result in a net loss of jobs. As much as people might like to see Wall Street "controlled" through taxation, it's difficult to pull off without damage elsewhere in the economy.

At Clusterstock, John Carney points out the reality that government stinks at creating reserve funds. The money winds up in the big pot and gets spent:

There is no way to actually have the US government accumulate a financial security surplus. In one way or another, the surplus results in the purchase of government bonds, the purchase of government bonds will generate revenue for the government, and that revenue must be spent.

In the words of humorist P.J. O'Rourke, "Having a government Trust Fund is exactly the same thing as not having a government Trust Fund."

Your thoughts? Do you support a tax on Wall Street transactions?

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I have read more than a few hundred articles the past year on the proposed Wall Street financial transaction tax. It is a tax on Main Street like in the UK. If bailed out firms actually fail to get an exemption like in the UK, the increased costs of firms own transactions will be passed onto us anyway through higher fees and reduced yield in addition to the cost of our own transactions. This tax is purely intentional wealth destruction of the middle class. We have no other options to accumulate a bit of wealth. The cost of the tax itself is a fraction of the total cost. Consider substantially increased spreads as a result of nearly all short-term trading ceasing and unable to overcome that "tiny" tax. I'm talking about what it will cost the average long-term investor or your fund's manager to purchase a share of stock for you. Right now spreads are $0.01 per share because of lots of highly competitive trading. All those traders are averaging one cent gross to facilitate your purchase. Even proponents of the tax admit that trading activity will return to the 1980's and spreads will cost $0.53 on average. Guess who will make that 53 cents? The exempt bailed out banks after all the competition is destroyed. That would be a 2% loss on the purchase of a $25 stock and 2% again on the sale in addition to the tax and much higher broker fees. Imagine the reduced compounding. Yields will be reduced by 1/3 to 1/2 over a lifetime of long-term investing. The new tax will not raise $150B, more like $15B after 90% of trading activity simply ceases, and far less when subtracting other revenue. A study from the Independent Budget Office of New York City concluded that such a tax would result in net Negative revenue with 100's of thousands of jobs lost if just the NYSE and AMEX exchanges were taxed. A few million jobs would be lost if all exchanges and the entire financial sector were to be taxed. Income tax from millions would no longer be collected. Capital gains revenue would plummet as money is moved out of the market for higher returns with far less risk and lower expenses. The whole point of the markets is for businesses to easily and cheaply raise capital to operate which in turn creates real jobs. This tax will make it much more difficult for businesses to raise capital. Even more businesses will move out of the US destroying a few million more jobs. All that destruction to "create" a few temporary jobs. It's really sad to see such ignorant ideas even being mentioned.

I think for every job lost, I bet more than one new job would be created because it would encourage better, more productive trading practices.

Think of how many bazillions of dollars every day blink in and out of electronic accounts without every getting put to good use, like investing in new production capacity or new technologies.

Take away this useless trade blitz and you'll see investors looking for returns in other places that could actually help boost productivity.


So you and others think that traders serve no useful purpose? It's only about a brief transaction that produces a profit (hopefully).

A few years back Google went public. They raised billions of dollars from their IPO. Part of what enabled that is that investors knew that once they invested, they could quickly and easily get their capital back if they chose. This is called liquidity. The investor one day decides he needs his money, he decides something unfavorable might happen, etc, and he can quickly sell.

Remove that liquidity and how does he sell "quickly and easily". Traders are willing to buy if they can resell quickly at a profit. This lower risk. Put a tax on them? They leave the business. This means less liquidity for the investor. This means that instead of paying up for shares of Google, they offer less because they know they cannot sell as easily and quickly.

In our society, the way it was supposed to work is that people are free to do what they choose as a business. What drives them out is that there is no NEED for their activity, no useful purpose. Yet we see here that there IS a useful purpose, because the trader exists. He will only be driven out by government, not by the markets themselves. The magic of our system is that when the secretary no longer is necessary because the computer was invented, the secretary then retrains herself to do a job that IS useful to society. It's the market that makes that decision.

So again, it's obvious that the market won't drive traders out of the business. Only government can do that via this tax. And when they do, it will end the useful purpose that traders provide, and thereby raise costs along every level of the capital process.

Give it some thought. Socialism does not work.

Finally a sensible article about this tax. Defazio's tax as currently proposed at is far too extreme and has potential to cause a major increase in market volatility, which is bad for everyone, not just Wall St fat cats. The stamp tax Defazio keeps mentioning in the UK has so many loopholes that no professional traders there actually pay it -- that's why their exchange retains high volume. Also, the more Defazio's tax succeeds at curtailing excessive trading, the more it fails at bringing in cash (less volume = less tax revenues) -- thus, it's a truly self-defeating tax. A far more realistic approach would be an increase in capital gains tax.

Speaking as a British National...this tax would be disasterous if it was passed. Liquidity in the US financial markets would drop like a stone overnight. The major damage would occur in the products used by companies, government entities and individuals for hedging risk such as futures and options in commodities and financial products. It would become impossible for any trader of these products to eek out a living when he/she is being taxed on every transaction as opposed to being taxed on the profits that he/she makes.

Traders add liquidity by seeking very small price discrepancies and taking the other side of the trade, as a result everyone benefits as a result of tighter spreads and a pricing mechanism that is fair to both buyer and seller. I feel ridiculous for having to mention this but with all the rhetoric about 'Wall Street and Main Street' this fact doesn't seem obvious to all.

Brokerages would become unviable business entities overnight due to the sharp drop in volumes and many of the financial exchanges very existence would be threatened. It doesn't take a genius to see that this would lead to enormous job losses. Some liquidity would move away from the US but that is assuming other nations such as the UK and those in the Eurozone don't follow such a hairbrained idea, if they did much liquidity would simply vanish altogether.

But ironically the biggest loser of all would be the US Government and taxpayer itself. The annual borrowing requirements of the US Treasury have quadrupled since the crisis began due to the enormous deficits that the US is now running. These are being financed by Chinese and Japanese investors buying US Treasury bonds and they would run a mile as soon as the liquidity dries up. The end result being at best a higher cost of financing the deficits, at worst a massive flight of capital away from the US dollar, a complete collapse in the currency of Zimbabwe proportions.

I think future generations would realize that the passing of such a tax would be as harmful to the US and the world ecomony as was the rise in protectionism that occurred after the 1929 Crash, culminating in WW2.

It is a very dangerous idea indeed and I hope for my children and grandchildrens sakes it does not happen.

Lets be honest about the motives behind this bill...it is to punish banks like Goldman Sachs, Citibank, Bank of America, etc that (allegedly!) lost billions when the property bubble burst, were bailed out by the taxpayer and now have no shame in paying themselves billions in bonuses. And that stinks doesn't it?

Ironically though if it does pass in any shape or form there will no doubt be last minute exceptions made for 'important liquidity providers' such as Goldman, no doubt due to their connections in high places and key role within the 'Plunge Protection Group', the working group created by the Government but assisted by private banks to allegedly(!) manipulate the stock market on behalf of the Fed/Treasury, no doubt for the 'greater good'...

As an independent trader I would be happy to see Goldman brought down a peg or two for (allegedly!) raping the taxpayer and paying themselves enormous bonuses...but this is not the way to do it. You need to directly target all firms that received taxpayers money during the peak of the crisis when they could not finance their operations without state aid. The private banks were bailed out after all, if my business was able to recieve a loan directly from government I would be happy to pay a slightly higher rate of tax for this privilege! But my business does not pose systemic risk so it is not worthy of consideration!

The transaction tax however is a crude and poorly thought out proposal devised by left wing adademics and politicians that will not dent Goldman and the larger players but it will eliminate the small independent trader that has not received any taxpayers funding, had absolutely nothing to do with the crisis but on the contrary makes a vital contribution to liquidity in the marketplace in the purest sense.

And the key word here being 'marketplace'...do we want the financial marketplace to be a real market comprising of a numerous and diverse mix of participants, small and large, or do we want it to be solely comprised of government entities and a small band of privileged banks, 'too big to fail', with questionable ethics, but strong on government connections?

Because this tax would result in less competition in the capital markets, wider spreads and costs, greater central planning and power concentrated in fewer hands and every investor, saver, commercial hedger, etc etc would lose out.

But this is kinda obvious, isn't it?

While I ended up "reading diagonally" the last half of the commentary posted thus far, many of the commenters claim that "thousands of jobs will be lost." I would like for them to provide concrete evidence of this. Without such proof, I perceive the claims as simply "the sky will fall" rhetoric.

Personally, I favor some kind of trading tax on stocks that are sold from a portfolio, including stocks sold by pension plans, insurance companies, and the like. Perhaps the tax could be graduated: Stocks held less than an hour, 1-percent tax; stocks held less than a day, 0.75-percent; stocks held less than a week; 0.7-percent; and so on. Stocks that are held at least 5 years could be sold without being taxed. My reasoning is that more effort would be expended in evaluating the long-term value of a company.

or how about NO capital gains tax or any stock held for five years or more?

That would encourage investment in companies with good long term prospects...

And maybe the taxpayer would even benefit because these companies would be able to raise funding that they are presently unable to recive, growing their businesses faster, earning greater profits and paying higher taxes...

And jobs would go up because such companies would hire to reduce their tax bill!

Like Tom above, I make my living as a daytrader. With such tight margins on my trades, this tax will put me out of business. Simple daytraders DID NOT cause the financial crises! The govt needs to come up with answers other than just more taxes which make a weak economy even weaker. I fail to see how putting daytraders out of business HELPS ANYBODY! Any politician that supports such a tax will absolutely get voted against by me! And I ALWAYS VOTE!

Like some of the other readers, I don't believe day trading is a particularly productive activity for the larger economy. It's basically a skimming operation.


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