A 0.25% Financial Transactions Tax - Good Idea or Bad?

Bob Herbert wrote an op-ed piece in the New York Times yesterday titled "Where the Money Is".

In the piece, Herbert talks about a "good idea" that was floated by economist Dean Baker.

Baker, who is co-director of the Center for Economic and Policy Research in Washington, is advocating a "financial transactions tax". This tax would be applied to the sale or transfer of financial assets such as bonds, stocks, etc.

Dean Baker says that such a tax would raise "$100 billion or more annually".

Here is a direct quote from Baker:

"It raises money in a way that comes primarily at the expense of speculation. The fees would be a considerable expense for someone who is buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3. The more you trade, the more you pay.

For the typical person holding stock, who is planning to hold it for a long period of time, paying the quarter of one percent on a trade is just not that big a deal."

A few things hit me when I was reading this piece:

1. Shouldn't we be encouraging people to invest in the markets right now (seeing as the markets are getting absolutely obliterated), and not discouraging them?

2. Where does this $100 billion dollar figure come from?

3. If the tax started out at say, 0.25%, how long until it was 0.5%? 1.0%?

4. I got a very anti-speculation vibe from this article. Is it so bad if I speculate on the direction of a stock using my own money? Money that I have already paid tax on?

5. I think that such a tax is a "big deal", but I'm glad that Dean Baker doesn't think so.

This just seems like a bad idea to me. What are your thoughts? I have included a link to the article below:

Source: NYT - Where the Money Is

Filed under: General Market News

8 COMMENTS - What Say You?

Comment by ron pratt on January 17, 2009 @ 2:04 am

i do not support the tax. being a daytrader, it would drive me out of business.

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Comment by Natural on January 19, 2009 @ 3:35 pm

I think you are thinking like sukrat, but I think you should cover the other side of the topic in the post too...

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Comment by I_Am_Main_Street on January 19, 2009 @ 6:17 pm

The securities transaction tax is being phased out around the globe. It does not do what the proponents claim it does.

I am absolutely shocked and outraged by this proposal to tax the poor that live on Main Street. I have read several blogs and articles on a proposed stock transaction tax. The call for making Wall Street pay for the financial crisis is a ruse to make the gullible poor accept higher taxes.

In 1966 during the Johnson administration, the stock transaction tax was finally removed to rid the poor of this barrier to wealth accumulation. Now the Elites are back and are going to make us bail them out for what they did.

The Elite Bankers and the sleeping government are blaming me and others for what they have done. The housing crisis has absolutely nothing to do with Main Street investors, nor the stock market, nor the exchanges, nor the traders, nor the brokerages that execute our stock purchases. I cannot believe that Main Street is being singled out to pay for something that we did not remotely have anything to do with. I am one of the poor. I am not the Elite Banker that made all of those foolish, risky loans. I am not the Government that fell asleep. I did not accept the responsibility of taking a huge risk and then default on my million dollar mortgage.

Outrageous lies. This is a very clever, deceitful way for the Elites to propose this tax and to tell the poor that this is revenge against Wall Street when actually Main Street will be paying nearly all of this tax for the wrong that the Elite bankers, and Incompetent Government have done.

The most powerful force in the universe is compounding interest. Without the compounding because of paying this tax upfront, this tax will cost me at least many tens of thousands over a lifetime. A miniscule 0.25 percent upfront tax my foot. Some Elites even want it to be 1 percent. Without the compounding factor, I will earn several percentage points less by the time I am too sick and old to work.

The million dollar mortgage defaulters and the banks are being bailed out. They and the government refuse to admit being accountable and pass the blame. They are going unpunished for their recklessness, get to keep millions in bonuses, get to keep their jobs and pensions, are receiving special tax treatment, and will demand exemptions from the transaction tax, but poor people like me will be the ones that will pay for what they have done.

Everyone in favor of this stock transaction tax is connected to creating this financial crisis. They are just too happy proposing this tax and are shirking their responsibility for the wrong that they have done. They obviously have a substantial pension to look forward to or are wealthy, trust fund babies or need a bailout. Well, good for them. Disgusting.

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Comment by steve reeves on May 04, 2009 @ 10:44 am

This tax does nothing to the guy on main street, who typically does not buy and sale on the stock market. Instead, he invests in mutual funds. This tax would effect speculators only.

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Comment by I_Am_Main_Street on September 07, 2009 @ 1:50 pm

Comment by steve reeves:

"This tax does nothing to the guy on main street, who typically does not buy and sale on the stock market. Instead, he invests in mutual funds. This tax would effect speculators only."
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No, not at all, Steve. Mutual fund managers will pay the tax each time they purchase and sell stock. The cost will be passed onto the investor via reduced yield. After more reading about this tax, an investor's retirement account will be reduced by at least one third over a working lifetime because of reduced compounding. Most funds make a complete buy and sell of stock once per year. That's 0.5% reduced yield. Stock trading is highly competitive. They average only 1 or 2 cents per share profit. That is 1 or 2 cents that you or your fund manager pays to purchase or sell stock. The proposed tax would severely reduce most trading. You will be paying 50 cents per share instead. Brokerages will fail. There will be much less competition. Brokerage fees will return to $100 per transaction like in the early 1980's.

We must learn what happened to other countries when they tried this tax.

Read about what happened to Sweden. The Canadian government’s Staff of the Parliamentary Research Branch did a comprehensive study on the transaction tax in the few remaining countries that actually still have or had the tax. Conclusion of their study: “Sweden, on the other hand, appears to be a classic example of an experiment gone wrong, while Germany, like many other countries, has decided that the costs outweigh any benefits from this type of tax.”

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Comment by Echosounder on December 09, 2009 @ 7:28 pm

I believe this is a not a good tax as it would make the fat cats on Wall Street pay their fair share.
The cost to the normal investor and even the small short term or day trader would be almost negligible.
Most of the revenue would be raises on the high frequency traders at the giant Wall Street corporations that use the most advance computer programs that generate huge daily profits. Even for them, this tax would only cost them a small amount of perhaps 10% per year of their enormous profits. Profits that run hundreds of percent per year.

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Comment by thisfineday@hotmail.com on December 09, 2009 @ 8:19 pm

I've been thinking about just how fair and responsible a "sales tax" on stock transactions would be for several months, unaware of proposals already on the table.
Very small amounts of money extracted from billions of transactions would return money hoarded in the market to the real economy.
I am also a day trader, most trades that I make are for 1000 shares. At .025 per share, I would be paying $25.00 each time I trade. I turn over a batch of shares at an average gain of $750.00. This kind of a progressive tax would be good for the real economy and only slightly burdensome to me.
On a selfish note, I would rather keep the wolves away from my door by feeding them than by building ever bigger walls that imprison me and leave them even hungrier.

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Comment by I_Am_Main_Street on September 19, 2010 @ 11:25 am

@thisfineday@hotmail.com

Rubbish! You are no trader. You are claiming that you make around 3% per trade. You should write a book on how to make 1000 times your capital in the markets every year. And the tax is not .025 per share. It is 1/4 of 1% of the value of the investment to buy or sell. So if you accumulate $100,000 in your 401k and sell your mid-caps for small caps, the tax will cost you $500 and worse than that the bid-ask spread will cost you another $2000+. You heard me. The tax will cause liquidity from lack of trading to dry up. Even the tax proponents believe the bid-ask spread will return to the 1980's levels or worse and cost us around 2% per round trip of a buy and sell.

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