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The Transaction Tax Is Harmful
Submitted by Zero Hedge on 12/07/2009 00:03 -0400
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I think the do more harm than good formulation is misleading.
Any transaction tax will be put into the software models, and the same computers will make the same trades that they currently do, except that the bid/ask spreads will widen to account for the lost revenue due to the tax (this is no different than the calculations about exchange fees / SEC fees etc...).
The net result is that on average, spreads will widen by roughly the amount of the tax. As such, the people who get hurt are not only the HFT / market makers who suffer due to lower expected transaction volume, but the retail investors who end up paying wider spreads on every transaction (due to the market makers paying the transaction tax), the transaction tax, as well as higher FINRA+SEC fees, as these too go up per transaction as total transaction volume drops (i.e. the SEC is going to get the same money regardless of how many shares trade hands per year, so everyone including retail pays more per share as volume drops).
If that were not bad enough, as spreads widen on all but the most liquid of names (I believe that most Dow components would still have 1 penny spreads, along with the frantic names on Nasdaq - but not much else), there will be an even worse distribution of capital in the public markets to companies, since a herding mentality based on reduction in spread costs would further inflate heavily traded names at the expense of less liquid stocks.
Much better to just tax the trading profits and leave the actual trades alone... since taxing the profits does not alter the market participants bid and ask prices.
I know nearly everyone on this blog hates HFT - but if you enjoy all time historic low trading costs and tight spreads (1 penny spreads on many equities and 1/2 penny all-in commissions available to retail traders), don't take them for granted. You're not going to get more money out of the likes of GETCO on a per transaction basis without having those same costs ultimately passed on to retail.
"the bid/ask spreads will widen"
...... so you will change the way you invest if it isn't cost effective for you ........
Any individual who trades a $100,000 portfolio and trades a few times a day if going to pay over $200,000 in commissions.
IOW, 95% of traders here are O-U-T of the game. Obama said he wanted to take the speculation out of Wall Street (because he is a god) and it will be like a $50 tax on a pack of cigarettes.
Do the math on your commissions and you'll see that you will not be able to trade. It will be cost prohibitive.
Solzhenitsyn warned of people like this.
Any individual who traades a $100,000 poertolio aand trades a few times a day if going to pay over $200,000 in commissions.
IOW, 95% of traders here are O-U-T of the game. Obama said he wanted to take the speculation out of Wall Street (because he is a god) and it will be like a $50 tax on a pack of cigarettes.
Do the math on your commissions and you'll see that you will not be able to trade. It will be cost prohibitive.
Solzhenitsyn warned of people like this.
You forgot the monopoly maintenance factor. They'll craft the transaction tax so that it's paid entirely by number 2 and lower on the speed totems.
I agree with the concept that any taxes are ultimately passed along to the consumer resulting in higher prices, so I would be against any increase in taxes.
However, we could consider state and federal RICO racketeering lawsuits, fraud lawsuits, and monopoly anti-trust actions (YOU KNOW, ENFORCE THE LAWS WE HAVE) as a tax targeting the evil doers instead of pulling us all into another tax net. The penalties have to be well in excess of the gain from cheating the system - a $1m fine per day on a scheme that nets $5m a day in trading profits is complete bullshit and only highlights a captured regulator/regulatory system.
The problem is that these firms are not making profit on the economic growth of various corporations and their investments in these credit & equity positions but rather acting like piranhas in skimming illegal profits from pension funds and individual retail investors - and then sharing the pirated profits with politicians in funding their campaigns with ill gotten gains.
If you want a new law lets start regulating profit and risk transparency. Like Sarbanes Oxley, we should put jail time on the line for CEOs and CFOs signing statements. Ensure systematic transaction details are embedded for all activity so that they can be audited later by the regulatory agencies, but put the burden on self reporting.
Why??? The SEC doesn't have a clue how HFT pricing engines work, market implications in up and down markets, and cash flows from and to different participants (can't measure and monitor systematic risk). Make self reported (auditible due to transaction details) transparency regulatory rules with large penalties and corrective actions for non-compliance, automate audits through computer red flags, make findings and fines public knowledge. Punish the evil doers.
You may catch your fair share of flack here... but you hit the nail on the head on this issue. Great post.
There should be a transaction tax, however, all those
earning less than $250K/year should be eligible to
claim a tax credit equal to all transaction taxes paid.
A small tax levied against shares purchased or sold would be a windfall for the Treasury and make HFT less profitable for GS. Most other purchases are taxed, why exempt shares?
Stock sales are already "taxed" via Section 31 fees that are used to fund the SEC. Please note.
Now there is a waste.
Because after lobbing efforts by out financial overlords, the cost will be bared by pension funds and the small, regular investors. It will only work, if the exemptions for those groups are made.
Yeah that is the real trickle down economics. Make the plebs pay for it!
I prefer an inactivity tax. You can't just sit around the casino and do nothin'.
If you have a net worth above $200 and more than 50% of your net worth is idle your entire net worth get's taxed.
And I want to see stronger regulation on those check cashing stores. You Mexicans can run but you can't hide.
the tax issue & related debate has been hijacked for the advantage of few. The benefits of tax cuts in the last 25 years were minimal for the middle class while were huge for the upper class. The whole tax cut issue has been used to get votes while producing little or no actual benefits for the middle class. If anyone needs evidence, loot at the inequality & social mobility studies in the past 25 years.
Fool us once, shame on you, fool us dozen of times shame on...
The root of the problem of Goldman Sachs was the TARP bailout - without that, they wouldn't be in existance any more. But, that's over and done with, so now we should admit our mistakes and figure out how to prevent them from happening again. Targeting Goldman Sachs, now, after we've bailed them out, WILL NOT HELP ANYTHING. All it will do is give jacobinite pleasure to the common person who has animus against "bankers". Bankers aren't the problem though; the politicians are.
Instead of passing a new tax, why don't we pass a constitutional amendment prohibiting ANY AND ALL BAILOUTS of any private firm. Make the language very clear. Don't worry about Goldman Sachs, they took our money, sure, but our government gave it to them. Be angry at the government, since they are source of the problem.
Why don't we as a Zerohedge nation just insist that Barney Frank, as an example, be voted outta office for supporting the bailouts. If we can focus on just one of these prime nitwits and GET THEM OUT, we have a chance to send the right message to the dildos in Washington WHO AREN'T LISTENING.
Politicians and the Fed are owned and operated by the same people.
tax me for having a big penis then....this is getting ridiculous
I think you guys are stretching this to far.
His penis?
Your imagination may come in handy..
I felt that avatar coming on. Since you have it out, I will offer the following answer to Tip e.'s question, here:
If you short it and Brrando goes long, we would tax you both.
Geopol: Maybe I should be a Gracie Allen to your George Burns?
MsCreant,
I wouldn't join an act that would have me as a member.Ya, I know, but I have to stay true to my avatar.
My next gig is at Susie's Surprise bar in Bangkok, no taxing on trades there
you said 'member'.
and 'Bangkok'.
Your unveiling my subtleties
Your probably safe there...
will u tax me if i short brando's johnson?
You mean like Lorena Bobbit shorted her hubby's Johnson?
Isn't that last name something? Bobbit.
brando's bobbit bails out bernanke's bubbles behind obama's bobbles
say that 3 times fast...
OK,
Brando's bobbit bails out bernanke's bubbles behind obama's bobbles while King Kong plays Ping Pong in Hong Kong, with his Ding Dong!!
Say it once slow.
When will we be able to see your cases for and against?
There should only be a tax on extremely short term trades. Lest we forget, the theoretical purpose of financial markets is to efficiently allocate capital to the most deserving entities, not to provide a form of legal gambling (I know, I know, what a quaint idea). Clearly buying and selling the same security in the same day is not an attempt at allocating capital; it is an attempt at gambling or momentum following or arbitrage or something else, but certainly not fundamentals.
There should be a transaction tax inversely proportional to the length of the round trip trade. If you hold the security for more than 2 years, zero tax. Between 1-2 years, 5% tax. 0.5 to 1 year, 10% tax. 0.25 to 0.5 years, 20% tax. And so on, until we get to round trip trades completed in less than an hour, 80% tax. Round trip in under a minute, 99% tax.
PS this "transaction tax" should then replace cap gains tax.
The function of financial markets is price discovery. Investors allocate capital.
Some of us are so old we can even recall when share prices were quoted in eighths of a point, spreads could be 3/8 even on a fairly active stock, brokerage fees were orders of magnitudes greater than they are now, and markets in general were not nearly as efficient. I happen to like things the way they are now, with penny spreads and never a problem finding someone to take the other side of a trade. This tax has the potential of returning us to the bad old days.
Just my opinion, but I am pretty sure that everyone, large or small, trader or investor, will wind up paying ten times over for it, one way or another.
WOW - I can only hope you're kidding.
The insanity of what you are proposing will hit you right between the eyes on the day that you decide to sell your stocks and find out that there is nobody that will take the other side of your trade.
Yes
Couple of suggestion.
1> If total buying and selling transaction amount below certain amount ( say $1million ) per year get exempted from taxes.
2> If one hold it for certain years (say 10 years) the tax is refunded.
3> For transaction not done in public exchanges ( e.g. dark pool and CDS ) the tax should be twice with no exemption.
By doing this small time retail player and 401K funds will have less impact.
I'm pretty sure you can count. I am a very small investor. I am in and out daily. My daily fuund is $150K. I hit your million mark on day 7.
Thanks. I need to pay more taxes.
So, exempt individual funds under 500K and IRAs.
3> For transaction not done in public exchanges ( e.g. dark pool and CDS ) the tax should be twice with no exemption.
Make that tax 100 times more!
Reprising my earlier comments ( http://www.zerohedge.com/article/frontrunning-november-19#comment-135677 , http://www.zerohedge.com/article/transaction-tax-becoming-distinct-possi... ):
Aye: A tax on large financial transactions will help to stymie the finance industry's game of generating large and increasing numbers of financial transactions on any given amount of real wealth - because, of course, it's paid by the transaction. What other measures are there that might possibly reverse the process?
Noe: A tax on large financial transactions will just cut the government (further) in on the game, giving it an (increased) short term incentive to keep the game going. Public-sector trade unions and other government beneficiaries will enjoy the same incentives.
Discuss.
now the trade of paper for better paper will create REAL value. It appears there is still a disconnect. at the beginning it all starts with someone shoing a horse, raising cattle and deriving eneogh profit to begin a bank.
town grows and prospers, now we have more banks due to our industry. Soon investment banks and other financial industry grows to meet the demand.
todays industry has shrunk to a double wide, and the finacials empirestate building is on our roof!
For anyone who didnt get it, the manufacturing roots and trunk are gone ,leaving the limbs of finance unsupported.
ZH. Thank you for allowing me to post with 0 kaptcha
must we tax everything. you can't work diligently to find solutions to problems, so you mindlessly, yet again, to tax your way out. brilliant
Then what about those people who trade with less than 50k?
For some reason I can't see the debate, neither the cases for/against nor the rebuttles. Nothing comes up when I cursor over the subtitles.
I think that they are trying to get a feel for the consensus of the crowd as they work their way through the debate. Most likely the points will be put up in some form of "frequently".
Anyone who thinks GS will pay this tax is ignorant. There will certainly be a loophole or exemption for market makers and/or liquidity providers and/or giant vampire squids. As always, the tax will only hurt the politically disconnected.
I think you're wrong.
Since the tax seems to be aimed precisely at GS, I can't see them being exempt without public outcry. And an election is coming.
Might I suggest a Username for your ZH experience: Ignorant1.