Wednesday, February 11, 2009

Trader Transaction Tax

I have to chime in on this topic as it is getting some cyber press in chat rooms and websites.

There is a proposal floating around out there to put a 0.25% tax on securities transactions. It does not sound like much. But it is not on profits made. It is on value of the transaction.

You can read up on exactly what it means and how it works elsewhere. I have a point to make here.

The government assumes it will raise $100 billion per year in added revenue. Are these out of touch pencil pushers that stupid? They assume that there will be no change in behavior of investors and traders. Let's see, this insignificant tax will kill the day trading business as it eats up the razor think profits these people strive to make.

Who cares about day traders? Everyone should. Day traders, swing traders, hedge funds and anyone else who does not buy and hold forever create liquidity.

Who cares about traders and the volatility they cause? Everyone should, not for the volatility but for the fact that a robust secondary market is critical for the primary market to function. Why on earth would an institution buy an IPO if there were no readily available market to sell into if needed? Companies would have no capital market to tap to raise funds.

Isn't the whole point of the stimulus plan to create liquidity? A transaction tax will reduce liquidity and, as another blogger wrote, cause securities related firms to go out of business and lay off more workers.

Here is a quote from a market analyst who gets it right, Chris Carolan:
"I've often said that a requirement for an economics degree should be time served in a trading pit with at least 1/2 their net worth riding on a wing and a prayer. All that rational market nonsense would go in the trash heap where it belongs."

10 comments:

jpmist said...

I'd rather we have a sales tax on trading commissions. Don't think that would hurt a bit and certainly wouldn't stop me from trading.

Face it, we tax every other transaction in our economy, doesn't seem unreasonable to ask Wall Street to give it up.

But I'm really writing to give Kudos for the Barron's article today. I've been thinking of pushing the panic button, but your article convinced me not to. Almost every position I have is trading lately on below average volume.

TaxSoftwareSite said...

The idea is simple as this: adding an unjustified burden on investors, without immediate security of gaining it back through ROI is a bad way to do things. Even with a very minimal percentage in taxation increase, this would translate to huge amounts of money since economic scale of monetary is just huge.

I think it would be better to spare initial taxation on investor and trader transactions, and bracket them depending on the amount of actual transactions made -- at least that way, there is already profit made for leverage of justified taxation.

Quick Takes Pro said...

jpmisst,

I stand by my story - but don't get too comfortable. I've never seen a market like this and I was indeed around for 1987.

Quick Takes Pro said...

Tax,

I see it as no different than taxing the number of customers that walk into your store. Some give you profit, some don't. But a tax on that or trades is a tax on just doing business, not on how much you make doing it.

But I think we agree.

Sudarshan Sukhani said...

In India, a securities transaction tax was imposed on all trades, equity as well as derivatives. There was talk of impending doom. Surprise! Markets continue to grow in volumes and the STT has become a big revenue earner. The key is to keep the tax rate manageable. It is one point three cent on 100 dollars for derivatives and 15 cents for equity.

patrick neid said...

How about this for once, just once, we cut government spending 5-10%.

Only the government escapes the real world. Instead they nickel and dime us to death.

Jim said...

Hello Michael,

Sorry this is a delayed comment, but I have a question for you re. the proposed Trader-Tax HR1068:

"Would an individual who daily trades open-ended mutual funds (such as Rydex, Profunds or Direxion - priced at 4pm) be subjected to this proposed tax?

And if so, what minimum holding period would be needed to avoid the proposed Trader-Tax?"

Thanks in advance. Regards, Jim

Quick Takes Pro said...

Jim,

The nuances of Washington are way out of my wheelhouse. You will have to ask that question elsewhere but I suspect a quick Yahoo (I am the anti-google) of the topic will turn up the answers you seek.

- mnk

richardsimms said...

This proposed tax is absolutely outrageous. I found a good site that keeps on top of it as well as contacts Congress for you. I keep checking it often for more updates.

Check out

http://www.VoteNo1068.com/

Quick Takes Pro said...

I have already used one website to fire off some emails to my congressmen. But I substituted all the politcally correct gibberish as asked if they were insane.