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The Transaction Tax Is Harmful
Submitted by Zero Hedge on 12/07/2009 00:03 -0400
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the problem with the question is that the implementation of the tax could be done in a way that is harmful or in a way that is not.
do i think a tax could be harmful, yes. if it is done in a ham-handed way where you are trying to fill in the holes in govt revenue by taxing every single trade in a meaningful way.
of course, they could tax trades on a small basis, or based on a certain volume level or based on some classification of the accounts owner. in those instances it may be beneficial to "rein in" the actions of major traders.
the necessity and time of the essence of any proposal could be debated though.
We in India have had a securities transaction for quite some time now. It has not impacted our market in any visibly negative manner.
It certainly makes life harder for scalpers. However the proposition that scalpers need to be prosperous to ensure prosperity of the universe of market participants is flawed at best. The tax collection is done by the broker who executes the transaction and then deposits it with the government. The mechanics of this ensure it is fair and equally applicable to all the market participants.
Not only scalpers but its hard to get in and out of positions for a swing trader with the reduced liquidity. Thats why Indian and other thrid world country exchanges move 10% when Dow moves 3%, there isnt enough cushion and liquidity to support the panic mom and pop speculators.
As a matter of policy, I would always vote for no new taxes.
And there's already SEC tax on each transaction when stock is sold. Look through your brokerage statements for SEC fees.
ZH,
Bravo on the Lincoln-Douglas layout! Been a while since I competed in those.
Hey, if Lincoln didn't really care about the blacks, maybe the banksters don't really care about us either:
"In his assessment, Bennett contends that Lincoln was, in fact, a white supremacist-- a political figure who made no secret of his belief in separation of the races, and a man who had no predisposition to tend to the ills of black folk. In what Bennett calls "one of the supreme ironies of history," Lincoln was "forced by circumstances to attend to the Negroes..."
http://www.ebonyjet.com/politics/national/index.aspx?id=11476
"I will say, then, that I AM NOT NOR HAVE EVER BEEN in favor of bringing about in any way the social and political equality of the black and white races---that I am not, nor ever have been, in favor of making voters or jurors of Negroes, nor of qualifying them to hold office, nor to intermarry with White people; and I will say in addition to this that there is a physical difference between the White and black races which will ever FORBID the two races living together on terms of social and political equality. And inasmuch as they cannot so live, while they do remain together, there must be the position of superior and inferior, and I, as much as any other man, am in favor of having the superior position assigned to the White race."- Abraham Lincoln
And, since Obama thinks he is Lincolnesque?
Hmmm....
Just tall, skinny, with big ears, that's all, really. Move along now...
People that are against taxes in general & other forms of government confiscation of personal property will be against a transaction tax - but they're not looking at this correctly.
It shouldn't be looked at as a tax at all, but rather as a leveling of the price of poker ... ante up, everyone.
The tax idea is akin to a village gathering to discuss politely asking the Viking raiders that pillage them every year to please share "their" profits with the villagers.
It's hardly a radical enough solution is it?
Finance, trading and speculating are important parts of the economy, they just shouldn't be the economy. When they become dominant the fact that they cannot, in themselves, originate value eventually comes more and more clearly into focus: they will force the public into playing the role of the final "greater fool" because their activities, in aggregate, have not added any value. Worse yet, the profits to finance are greatest when the assets being ramped are the least encumbered by anything so boring as a predictable cash-flow - think housing - so there's a bias toward the disastrously ridiculous and destructive (Icelanders as master bankers, the abomination known as Dubai.)
Unregulated finance is a doomsday device.
- break the big banks up
- reinstate Glass Steagall
- wind down off-market derivatives trading
- shrink the sector
If you want a tax, how about a personal tax on all finance industry employees above a certain payscale that is ear-marked to fund a new regulatory agency.
Oh and a tax on lobbyists. Maybe by the word.
Much of what I have read just does not make sense.
Who would want more taxes? Is this anger toward HFT?
I vote for a black box exchange where only computers can trade. The AlgoExchange. Then the NYSE can go back to trading among humans only. The two exchanges never interact and if the algo's ever display sympathy towards price movement at the NYSE the algo owner gets fined and taken off line.
Bring the floor back.
Then tax the HF traders. And tax them hard.
What do we need a new tax for? Just print more money.
"Strictly speaking, it probably is not necessary for the federal government to tax anyone directly; it could simply print the money it needs. However, that would be too bold a stroke, for it would then be obvious to all what kind of counterfeiting operation the government is running. The present system combining taxation and inflation is akin to watering the milk: too much water and the people catch on."
Congressman Ron Paul
Which makes the 3-ring circus around this tax 'debate' all the more amusing.
If we do a transaction tax then it should be collected the same way the law is enforced upon the Federal Reserve. All market participants fill out a quick form and submit it to a local clerk twice each year. Questioning the participant would be outlawed since that would impede the participants ability to set their own monetary policy. In this submission participants would self declare only what they believe should be in the public sphere since disclosure of other information could impair the perception others have of them and potentially adversely effect their stability and ability to engage in commerce.
The identities of the debaters should have been kept private as it may influence the polling.
Market micro-structure has been negatively transformed in the last few years, it's has become fragile and dangerous.
http://www.youtube.com/watch?v=V4cRYI2x60Q
A Tobin tax is one way to rebalance it, simple,direct. There are other ways, but nothing more complicated will be understood by politicians or constituencies.
Any tax is bad and just winds up getting passed on to the consumer or in this case, investor. I vote a big no on this tax!!!:))
Yet, strangely enough...GS is NOT returning their profits to shareholders but, giving it in large part as bonuses...I guess you get screwed either way.
You might want to clarify what a "yea" or "nay" vote means in this context. It is nebulous, because the proposition itself is case in the negative.
LoL. I was going to say something about that but I didn't wanna make waves.
Maybe it was written after composing a bunch of Captcha questions?
Yeah, we don't want "Anonymous" to be profiled..
http://www.imdb.com/video/screenplay/vi2059338009/
In principle I support a Tobin Tax, if it could be fairly and universally applied, at a small enough level to not materially affect the "little guy", of which I am one.
I'm a swing/position trader, who does this for "intellectual activity" and to augment other sources of income, which when combined with the "better half's" job, add up to a stable if modest standard of living.
If the tax could be enacted, enforced, and collected by fair and just rulers, I would have no objection, although it would widen spreads and add to overhead.
But, that having been said, I'm afraid if the tax is enacted it will be imposed only only on "the little people" and exempt any and all squids, market makers, hedge funds, TBTF banks, or other institutions.
As Leona Helmsley once said, "Only the Little People pay taxes".
KptLt. laughing swordfish
9er Unterseeboote Flotille
This tax... if enacted, who will get to bag it? The people? Haha... Sorry to crash the party, but it must be noted here that all, the so called, "laws" purporting to "protect the public" are here for one reason alone - to feed and thereby to immortalize the squid... "Tataglia is a pimp. It was Barzini all along."
so once we collect all the transaction taxes what's it going to be used for? bailing out insolvent institutions?
Ha ha ha ha--Yep!
I think we should have a fart tax.
Dearest fellow ZH readers,
I'm more than a bit surprised by the populist, pro transaction tax rhetoric. One wonders if any of you have thought this through. Markets, like ecosystems, require a diverse group of participants with different goals and time frames to function effectively. To say there is no "societal gain" from trading is absurd on so many levels it is hard to know where to begin. Traders and speculators are the ones buying your shares of AAPL when you decide to start cashing out your IRA. They are the ones who step in and start buying when the Dow is down 300 points like this past Fri. Eliminating this layer of liquidity from the market increases volatility and increases the likely hood of a crash and makes as much sense as eliminating sharks from the ocean or snakes from the dessert. All of them are necessary parts of the whole.
As currently proposed all stock transactions would be taxed at .0025% of the value of the transaction. A typical swing trader might be trying to capture a 1% move in SPY. If you traded 5000 shares the value of your transaction would be roughly $550,000. The one way tax on this trade would be $1375.00 or $2750.00 round trip (regardless of profit or loss) in an attempt to make $5000. Obviously no one will be trading with any time horizon shorter than buy and hold. Not GS, not MS, not hedge funds, not mom and pop. Essentially everyone will be on the same side of all trades.
And I ask all of you what amount of volume on the exchanges do you folks think comes from short term trades. 50%? 60%? And how much of the current value of the market is due to speculation. Again,50%? You all think this is punishment for the big boyz, but I would think long and hard about that. A 50% drop in the value of the NYSE hurts all of us. It hurts our 401K, it hurts pension funds. And do any of you think that in this digital age there is one thing that would prevent our exchanges from moving to a country which is not stupid enough to impose a transaction tax? If you want to punish GS then go after them directly. Please, let's not cut of our collective nose to spite our face, and please, spare us all the sanctimonious crap about societal gain.
"spare us all the sanctimonious crap about societal gain." Yes, greed is good after all.
I think that you are under stating the numbers a little bit. I fully expect a sufficiently harsh tobin tax to drop volume by about 70%. Maybe even more. It will make a lot of companies go bankrupt. And yes the 401K and pension funds will be severely hurt.
The thing is, this will happen anyway. Maybe not quite as severe, but 100 p/e? You can't be serious that you think that the market can stay here, can you?
In the end, we have to pay the interest on our national debt. Which other tax would you prefer?
Well, I don't have a clue where the market should be. Do I think current prices are sustainable or realistic? No, I don't, but that is just my opinion and I have been wrong so many times it isn't funny. I thought the market pricing was ridiculous in the 80's. I was convinced the entire charade could go on no longer and that we were all doomed to collapse and depression. Boy was I wrong, and that gets to the intent of my post. Are markets irrational? Absolutely. Do they overshoot to the upside and the downside? Of course. But the more diverse the opinions and goals of the participants, the less likely things are to stay at one extreme or the other. Are the markets a gamble? Of course...but what in life isn't a gamble. You make a calculated risk reward analysis every time you pull your car into traffic. We gamble that our career choice will work out, that the business we open will be a success, that our spouse will be faithful and our children will be born without a birth defect.
Greed is just one of many emotions and in the correct balance neither good nor bad. Greed adds a lot of energy to our economy. It is the driving force of capitalism and ideally should be tempered by fear. Capitalism has failed in large part because the element of fear has been removed by the knowledge that all loses will be socialized, while all profits are privatized.
The point of my post was to get us thinking about the transaction tax as has been proposed because as proposed we will kill the goose that laid the golden egg. All trading will essentially cease because it will no longer be profitable to trade on any time frame other than buy and hold. There will be no net increase in tax revenue because the targeted trading activity will cease....period. Is this really what we want to do. If a tax is to work it must be small enough to be almost unnoticed by market participants. Paying the interest on the national debt is easy...stop increasing it. Stop being the worlds policeman and use the money to rebuild the energy footprint of the entire country. Create jobs so there are more people paying taxes. As it is now we are trying to raise taxes on fewer and fewer middle class taxpayers. And by all means....go after the Vampire Squid directly. Asses a special tax on all their profits and use the money to shore up the rest of the financial system.
is est non logical causa..
--sorry--way to many random fragments here--
couldnt have said it better !
Super easy solution.
Tax ALL sales at one percent. But eliminate capital gains tax from equity gains. That would put a damper on high-frequency sales (or raise quite a bit of revenue).
So say I sell a call with a $1000 face value and make $50 on the trade-- you think it is "good" that Uncle Stupid gets to tax 2.5% of the profit on top of the ordinary income tax marginal rate? Hello- come in earth.
The Tobin Tax is a dead idea from dead economic thinking. There is no justification for confiscation on this level, even if you do think it would kill the squid. This kind of garbage comes up every depression when "speculators" are blames for volatility in the market. Just like "short-sellers" are blamed for collapses.
Face it, the government is broke and is desperate for a new source of revenue and will consider anything to bring in more taxes. No more of this supposed objectivist logic of "there's no benefit to society from trading". Ricardo proved that logic incorrect nearly 250 years ago.
"No more of this supposed objectivist logic of "there's no benefit to society from trading". Ricardo proved that logic incorrect nearly 250 years ago."
Granted that this is true, and that therefore the socially optimum size of the financial industry is far above zero, and even well above the smallest possible size that could sustain an industrial economy. But it doesn't necessarily follow that the current financial industry shouldn't be a lot smaller than it is. By analogy, it's undeniable that real estate has plenty of benefit to society, but equally undeniable that there's often much too much construction during housing bubbles.
If you do want to take the further step and argue that the financial sector isn't too big, then the obvious argument to make is that market forces do the job of keeping the sector at roughly the right size for any given time. That's a weighty argument, but it seems there are reasons to doubt it. First, the construction-bubble analogy comes into play again, suggesting that things might not necessarily work like that. Second, it's not hard to think of market distortions (credit subsidised by depositor guarantees and TBTF?) and/or market failures (Fisher/Minsky-style credit cycles?) that might hypothetically cause the financial sector to grow too large. Third, when you look at how the financial sector grew as a proportion of the economy between 1983 (or 1993 or even 2003) and 2007, it seems almost impossible that finance was just the right size in '93 and just the right size in '07, or that it was vastly undersized in '93 and just the right size in '07. There can't be many people nowadays who would claim the finance boom produced the enormous gains to the real economy that would be needed to justify such an expansion.
So I find it hard to escape the conclusion that finance was much too big in 2007, and probably is now. Of course, that doesn't necessarily prove that a Tobin tax is the right response. It might be a wrong solution; it might even be an ineffective solution; if the financial markets slump again shortly, it might be a wrongly-timed solution, a classic example of pro-cyclical regulation. And then there are the political consequences of cutting Congress in further on the financial game. But the problem seems to be real.
1000+
As I understand it, taxes paid are generally deductible from taxes due as there is still a general unwillingness to tax a tax.
In principal, a tax would help level the playing field. I pay a minimum of $19.90 for every executed trade. $9.95 to buy, $9.95 to sell. I doubt brokers pay any fee at all and generally collect these fees from which they already pay any applicable taxes.
At $20 then, any stock I buy requires a .20 cent move to break even on a 100 share transaction. To watch the sheer volume of 100 shares transactions that fly by on so-called "penny stocks" makes it clear that few are as constrained by the .20 threshold.
Citi at $4 requires a 5% move to break even for the retail investor and Friday's volume was 260 million of which probably 98% were 100 share transactions.
To the extent then that other market participants can be said to pay substantially less or nothing (and I know of ways to pay substantially more as well as less), how can it be said that the market present a level playing field?
Taxation then is a politically incorrect term. Something like "tariff" would be more to the point. In differentiated exchanges, if a zero fee broker wants to trade against another zero fee broker, then no tariff is imposed. But the market is set in the exchange of the retail investor where all are subject to a "equalizing" fee (already imposed to some extent on the retail investor), commission (options), or tarrif.
You are assuming that this will be a tax as defined by the Internal Revenue Code. Also, not all taxes are deductible.
If it is characterized as a fee, it may not be deductible as well. For example Section 31 fees that are fees levied on stock sales and options trades, the proceeds of which are used to fund the SEC, are not deductible. Anyone who has ever sold a stock or closed an options position has paid this "tax"--do you ever remember deducting this fee from your income?
Ya know..............those of you who emotionally participated in this debate need to consider that you've been seriously sucked in. I mean really, do you think this argument, one side or the other, has more significance than a hill of beans? C'mon, people........NO ONE CARES WHAT ANYONE THINKS ABOUT THIS PROPOSAL SINCE IT'S NOT AND WILL NOT BE ON THE TABLE.
With all due respect--Wrong. This tax will be debated as part of the next stimulus bill--perhaps before the end of the month, but certainly early next year--Count on It.
I'm glad you didn't get emotional.
Normally I would vote against any such tax but as long as it's administered fairly to all, then it "possibly" could reduce the rampant HFT that isn't good for the markets.
I'd rather have this kind of tax as it would probably make the markets a much longer term objective for most investors. As a daytrader I'd get hit but I think that GS et al skimming a few pennies on millions of transactions each day is definitely NOT helping the markets.
The devil is in the details of course ;)
Lets just give the SEC all their caseloads on a silver platter and call it a "donation"... otherwise its a bridge to nowhere
Borrow your liquidity from the Fed and the Treasury at zero (and knowing that the government will backstop your crooked game), play pattycake with the few remaining market participants (your pretend competitors in the casino cartel) as you run the market up (skimming fees all the way), pay yourself large, ill-gotten bonuses, and when you get those bonuses, buy gold and store it in off-shore tax havens.
Sorry, Anon #145161, liquidity is an illusion funded by the American taxpayer. Paper assets are a mirage.
The whole system is based on faith and trust that was ripped out with extreme prejudice last fall. The only thing not (yet) outsourced to foreigners is the American military and the New York Cartel.
This tax idea is all about getting me. Yeah, that's right, ME. I'm the ONE GS needs to eliminate from the trading scene. Why? Cause I'm the one who has solved the enigma of how astrology controls the markets. I know how and they don't. They'll never figure it out. And I am RAPING them every day on every trade. That's why they have their Congressional Lackies going after me. And it won't be a per trade fixed amount. It's going to be a % of the Trade amount. And for sure they will be exempt.
I have to say, almost everything I read on Zero Hedge seems well-informed and based on solid logic. Everything except this topic. When it comes to a transaction tax I hear things that make me cringe and never want to come back to this place. The lack of understanding of markets is just appalling, especially what seems to be a total inability to grasp one critical concept for healthy markets: liquidity. Now, as I explain, let me say I hate the Vampire Squid as much as anyone, and think they should be abolished immediately. This point/argument is not about what they 'contribute' to this process.
Markets need liquidity, they need ‘depth of market’. Without this, anyone who needs to sell anything of any size will drop the market a large amount, and get a very poor price for what they sell. The current prices will not be very representative of what can actually be obtained, even for small sizes. Now imagine if there is any quantity of selling by multiple parties. It could move the market enough to induce mass panic. We need no more evidence of this than looking at what happens when one trades an illiquid stock with a wide spread, or when any vampire-like entity starts moving an illiquid stock. You see huge, out of proportion moves. This is not good for investors. Nor is paying up on a very wide spread, even if one is holding. No matter how long one holds, paying too much to get in and out is still a screw job.
Traders and speculators have their place, their role, and a big part of this is in being there to take the other side of the trade, for mutual funds, for hedgers, and so on. Most don’t make money, since as we all know, most traders are not successful. In fact, an argument could be made that small traders who provide a lot of this liquidity are net market neutral, in that the few who do make money are fully ‘subsidized’ by the loses of the perhaps 90%-95% that lose money. So, net overall they cost the market nothing and collectively provide a lot of liquidity. This is an entirely different group of people than Vampire Squid HFT maniacs who bleed the market dry and screw everyone. Yet they are grouped together like they are one and the same, and one approach is being crafted to stop them both.
Look, it’s all great fun to poke fun at the knuckleheads at the local coffee shop trading on their laptops, running the junk stocks up and such, but I have been at this a long, long time, and I’ve yet to see a single one of those kind of traders stay net profitable over time. So, if they are not net profitable, what is the reason to stop them from hurting investors. They are actually paying in to the system, not taking out. And what investors that we so want to protect are involved in those stocks anyway? None that I know of. But we are getting away from the key point.
Just like any ecosystem needs predators, we need liquidity providers. We need small speculators and small traders to provide depth of market. Without them, spreads will get incredibly wide, and depth of market will be very shallow. Yet human nature is to wipe out all the predators, and let the deer multiply until the entire system is out of balance. Even this analogy is not well-chosen, because even if anyone got the point, they’d still then equate these small liquidity providers with some kind of ‘predator’, and that couldn’t be further from the truth.
And as far as this tax not hurting investors, again, I see just a horrific lack of understanding of markets when I hear this. And from Zero Hedge people. I don’t get it. Imagine if all investors just bought and held. Markets would only go up. Great, right? Until a market or an issue got to 10X ‘fair value’, 100X fair value, 1000x fair value. There are no short traders to keep the value in line, as traders don’t exist. Sure, some will sell when they have a lot of profit, but most just hold, and the price rises endlessly.
Without a two-sided market, without speculative short traders (I don’t mean scumbag, illegal naked short sellers with huge leverage, I mean law-abiding small short side speculators and liquidity providers), there is no balance, like an ecosystem with all deer and no predators. You don’t see how unhealthy that is for a retirement account in the long run? Investors should be buying into stocks at 1000X fair value? Imagine if any event happened and most wanted to sell at about the same time, and no traders, and no buyers.
But also, mutual funds, although I agree they shouldn’t be ‘trading’ a lot, do buy and sell and rebalance frequently, and they should. With this tax, that will not be possible. Any rebalancing would have to be passed on to the holders, the people trying to ‘buy and hold’. There just isn’t a lot of thinking going on here about this. Just a measly 1,000 shares of a stock like AAPL and we are talking about $2,000 round trip in taxes, whether you made money or not (0.50% (this is the high end I have seen proposed) times two times the cost of the stock).
Every investor that wants to ‘rebalance’ his stock allocations, even every quarter, is going to get hammered. Out of one stock and into another, once each quarter (just an average, not all sell everything every quarter, this is just an example) drops 4% return per year just on that small rebalancing. If they are getting an average of 8% per year, a full 50% of their return goes to taxes for very simple rebalancing. That doesn’t hurt investors? Not to mention the much wider spreads they will pay, and the huge drops in price without liquidity.
What needs to be done is stop HFT and the Vampire Squid, but leave small traders who make a contribution to liquidity and provide a huge service to the greater good and the economy alone. Likely they are ‘self-subsidized’ anyway, and surely take little or nothing. And even if they did take, they are providing a service for what they do, just as a doctor doesn’t ‘take’ from society because he gets paid. But I can guarantee you what is going to happen. All this discussion is moot. They will pass this, supported by Zero Hedge, and exempt the Squid and others, and all the small traders will go out of business, along with all the quote vendors, trading software, tax preparers, valid educational firms, and all the other support players, which likely number in the hundreds of thousands in total.
Can one really say someone working at a quote firm programming or bookkeeping, or as a secretary at an educational firm doesn’t contribute to society, but someone who does a similar function for a strip club does? Or for a coffee shop? Or for a shop in a mall selling trinkets that none of us need? Look, small traders didn’t cause any of this, we all know it was insanely low rates, unregulated derivatives, crazy levels of liquidity, unregulated derivatives, no rules ever for the Squid and kind, unregulated derivatives, and, oh, did I mention, unregulated derivatives.
And, once again, let’s blame small traders who are providing a service while the Squid takes 100 million a day out of our asses, and let’s pass a tax that puts the little guys out of business, along with all their support businesses, and leave the Squid exactly as they are. Good solution. C’mon Zero Hedgers, use those brains you seem to display so well in other topics and think this one out.
Your post, and Marla's, are reasonable. I think the bigger issue, though, is the whole financialization of the economy since the 1970's. Why are so many people working in the financial economy, as opposed to, say, productive capitalism? All these algorithms to profit from changes in exchange rates or milliseconds have not made my life as an end user of anything any better. Some of the so-called positives are to prevent me from being shafted in this dysfunctional finance-based economy in the first place. Additionally, I'd argue that things are markedly worse than before the Lords of Wall Street declared their control of the US.
If Las Vegas and Atlantic City had been in control of the US government for the last 30 years or so, what would the laws be today? Would those laws be positives? We might be here debating the merits of laws limiting "mechanics", the card cheaters who work for the house. Those guys are surely needed to provide liquidity in Vegas.
Well reasoned and insightful, to be sure. The fallacy is that you assume TPTB operate with the same sane reasoning and principles. They don't. Any reasonable course of action can be trumped instantly with a nice sized political contribution or a passioned appeal (by a lobbyist) to one's "principles". The first and most basic problem to solve is to institute some term limits amongst our elected officials.