Now how does instituting a tax on stock trading help and who does it really hurt? Congress and Obama have embarked down a very dangerous path.
Unintended Consequences of Levying a .25% Stock Transaction Tax
by Ron Rowland
Congress is considering legislation to impose a securities transaction tax of 0.25% on every stock trade, which of course is equivalent to 0.5% for each round trip. It's known as H.R. 1068: Let Wall Street Pay for Wall Street's Bailout Act of 2009.
As currently written, the bill amends the Internal Revenue Code of 1986 to impose a tax on certain securities transactions. The authors presume it will produce enough additional revenue over time to recover the cost of the $700 billion Troubled Asset Relief Program. Representative Peter DeFazio, D-Oregon, authored the bill.
[Related -Abercrombie & Fitch Co. (ANF) Q2 Earnings Preview: The Unkind Quarter]
This bill takes the "law of unintended consequences" to new extremes. You and I did not create the problems of Wall Street. You and I did not receive any Bailout Dollars. As taxpayers, you and I are already paying for the TARP. To start charging us 0.5% for each round trip trade is only adding insult to injury.
If you have portfolio turnover of 100% per year, then this tax represents a 0.5% per year burden. If you are a more active trader, perhaps with an average holding time of 25 days, then it robs you of 5% per year. If you do multiple trades a day, then forget it - you are out of business.
[Related -Workday Inc. (WDAY) Q2 Earnings Preview: Built In Surprise]
If active traders are removed from the market, what happens to volume? It will dry up, of course. Then you and I will be paying more for each transaction in the form of an increased bid/ask spread. The bill claims to recoup the cost of TARP, but I bet they did not factor in the severe volume reduction that the bill would create.
This proposal has a host of other problems, many of which are highlighted in a great article by James Ramage for Traders Magazine entitled Industry Fears Proposal in Congress Would Destroy High-Frequency Trading and Liquidity.
This bill will hurt too many people, and they won't be the people it is intended to hurt. A ground-swell of opposition is already forming, but with the public's current anti-Wall Street mood H.R. 1068 could still slip through. If you see the folly of this idea, let your Representative know how you feel.