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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:
Under a bill being drafted by Democratic Reps. Peter DeFazio (Ore.) and Ed Perlmutter (Colo.), the sale and purchase of financial instruments such as stocks, options, derivatives and futures would face a 0.25 percent tax...
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 daytrade for a living. In my life I've worked as a custodian, logger, farm worker, college professor (w/doctorate). What do you think I do, just count my coins all day? My wife and I give money to nonprofits as well as our local community through shopping and restaurants. We are not rich. But daytrading helps. All that is going to stop if this tax goes through.
How do day traders make life better? I don't know much about investing or day trading for that matter, but to me it doesn't seem like a job that helps anyone other then themselves.
I don't mind the idea of raising capital gains tax. It you really want to live on the edge, hold a stock for a year.
He might have a point. Most day traders proably are money losers, so they're injecting cash into the markets.
Although, I don't think it's small-time day traders who are specifically targeted. I think they're targeting giant hedge funds and quantitative trading (a word for fancy mathematical day-trading) funds.
Perhaps they could adjust allow an individual investor up to $100,000 in trades per year tax free or braket the rate depedning on the number of trades.
You don't personally see the value of active traders and investors because you aren't in the industry. If you were, you would understand the devastating impact on jobs throughout the country that would result from a transaction tax.
And your attitude is ridiculous. Active investors don't bring value to your world, so go ahead and tax them? So they can do what? Join the unemployment lines and add to the foreclosure lists?
Judging by the amount that daytraders pay in taxes, these taxes contribute plenty to the treasury while providing liquidity in the stock market. Socialism is a failed system of envy that spreads little more than misery around - that's what this bill appeals to, imo, the socialists.
Just because you know little about being a trader, doesn't mean you should support putting them out of business! I may know little about a variety of professions, but that doesn't mean I want to see them destroyed! How does writing violent video games help anyone other the creator and his company while contributing to the decline in our culture? There are plenty of professions that many of us may subjectively agree aren't good for the country - but that doesn't mean we should tax them out of business. Will you, personally, support my going back to school for 2-4 years if this bill passes? Can I just send you the bill? It seems to me, we are best off with as many people as possible keeping their current jobs and not raising anyone's taxes in this weak economic environment. Daytraders did not in any way cause the financial crises!
It's about market participation and price discovery. The liquidity and narrowing of spread to a penny didn't occur out of thin air. The benefits are greater market participation has help the ability of pension funds and mutual funds dramatically. In markets you must have a buyer and a sell, that integral function is dependent one the buyer or the seller to accept the risk of their counter-party. Without that component you can't have orderly price discovery and thus increasing the cost associated to all investors. The world in evolving and markets are opening up all over the world, the US can't afford to lose the competitive edge that it enjoys with its financial markets. There is is extreme value in all market participants, wether they are small day traders or large institutional investors. This tax would have a devastating effect on the US capital markets and their structures. The cause of the market turmoil last year was the lack of liquidity and this tax strikes at the heart of liquidity.
How about a tax on derivatives alone. I think Ralph Nader floated this idea during the presidential campaign last year. It made sense then and it makes sense now.
The fundamental idea of a stock is that you can take an ownership stake in a company because you like what they do, think they are going to succeed and want to be a part of it. Why would we want to tax that?
The DeFazio bill will go about as far as a car with square wheels.
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