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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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Should have let those banks fail, sure, there would have been pain for all of us for awhile, but then again, we would have lived in a true capitalistic society right? hmmmm, congress and the fed bailed out those banks, not average Americans, and now the average American pays the bill, this is wrong!
Those who think Congress and the Fed didn't bail out average Americans didn't come through the Great Depression: Millions of small bank-account holders (my paternal grandparents among them) lost money to the bankers that they never recovered. The only reason the same grandparents didn't lose their farm mortgage to the same bank was that FDR was smart enough to come up with the Farm Credit Bureau; and over the next several years my father and his brother were able to save enough money to get the farm back from the FCB. Had the bank had its way, the farm would have gone the way of my grandparents' bank account.
As for a Government Trust Fund -- look at what's happened to the Social Security Trust Fund, the Highway Trust Fund and the Airport Trust Fund. Congress has always used them as piggy banks in order to offset the deficit.
Hi Scott. A transaction tax is a terrible idea. Here are some of my thoughts from my blog
"[The reason this is such a bad idea] has to do with behavioral economics. This kind of a tax changes the playing field as a result of which all sorts of people and participants will change their behavior. ALL of these behavioral changes have to be taken into consideration in order to show the overall tax revenue implications of such a proposal.
If you understand the way markets work, and especially what has happened with the technological and information revolutions since the 1980’s, and that an entire culture and its related multiple additional subcultures have arisen all around the markets as individuals have participated in many ways as never before, then you can see that the collateral damage will be MASSIVE. This MASSIVE change will have significant tax implications which almost all advocates do not even think of, much less mention. The question is the OVERALL tax revenue implications of the proposal given all of the subsequent changes it will cause.
The result will be much less corporate revenue, less individual revenue, job loss, small business loss, website and pay site implications, computer, phone and internet implications, and the list gets very long very quickly. All of those additional changes will result in more revenue loss for the government."
Why do something to raise revenue which will actual net a LOSS in tax revenue? And, yes, it will cost a LOT of jobs, in many places that people do not think about like software design, website design, accounting, etc.
Dr. Kendall Harmon
Summerville SC
I make my living as a day trader. This tax will put me out of business. Instead of paying tens of thousands of dollars in taxes every year, I will be unemployed and paying zero taxes. How is that good for the budget deficit or the economy? In addition to traders like me losing their jobs, there will be thousands of layoffs at brokerage firms. And when the transaction tax causes daily volume to drop to a trickle, the amount of tax collected will be a pittance compared to the economic damage caused by thousands of people losing their jobs.
There are many thousands of middle class jobs dependent on the business of creating and processing financial transactions. These jobs are not just on Wall Street, but located throughout the country in data centers, call centers and support operations.
It is very easy to imagine that there will be a net loss to U.S., both in terms of overall revenue and jobs.
Most trading is currently done on very thin profits-per-trade, and there will be no sense at all in continuing these activities on the part of individuals or institutions. Trading volume will drop dramatically, cutting into any gains "imagined" by the sponsors of the bill.
Finally, I want to make the point that our economy is currently at a tipping point, and enacting a transaction tax is an extremely risky move with many unintended consequences.
The transaction tax is a tax on MAIN STREET, not Wall Street. Millionssssssssssssss of middle class people have brokerage account where they buy & sell stocks. Do you realize that the 1/4% transaction tax will result in a $270 tax on buying & later selling 1,000 shares of Walmart? How is that a small tax? How is that on Wall Street? It's on you, me, and the millionssssssssssssssss of others with brokerage accounts. Totally unfair & unjust. If you want to tax Wall Street, put a windfall profits tax on Goldman Sachs, Morgan Stanley, etc.
First, Walmart is going for $55/share. So a 0.25% tax on selling 1,000 shares would be $137.50, on a $55,000 sale (not $270).
Second, I think you may be a little out of touch if you think the typical "main street" trader regularly sells 1,000 shares of Walmart.
...or if you think that someone who just sold $55,000 worth of stock would be destitute if they had to pay $137 tax on it.
The tax would be $270 on the combined buy & later sale.
$20 in commissions & $270 in TAXES!!!
I'm a small middle class guy who has srimped & saved for decades and using margin I can buy 1,000 shares of Walmart.
I'm not a Wall Street worker.
I have a job & do this on the side when I can.
$270 is a TON of money to me.
You're not going after Wall Street investment banks with this tax, you're crushing the millions of middle class people with brokerage accounts.
Why not tax the Wall Street firms directly if that's your intention to get more money? Take their bonus money & have the firms pay that in taxes.
Problem solved & the middle class isn't effected.
If the street is against it, then it must be a good thing! But we must be careful, because they will always try to be one step ahead of the good intentions for the majority of people they take advantage of. Thats the business of America, capitalism and making money. This is all well and good. But as a society changes, so do the laws that govern that society. What makes good sense is to have a healthy country with happy people, not some dream of making it big in America while the vast majority of people sink into poverty.
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