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samclem 12-01-2009 10:42 PM

Tax on stock trades being considered
 
It looks like several legislators are working on a proposal to tax equity trades.

Quote:

House Democrats are clashing over a draft bill that would tax financial transactions in an effort to raise $150 billion per year.

Democratic Reps. Carolyn Maloney (N.Y.), Mike McMahon (N.Y.) and Debbie Halvorson (Ill.) are circulating a letter opposed to the stock transaction tax idea. They're squaring off against the tax's main supporters, including Reps. Peter DeFazio (Ore.) and Ed Perlmutter (Colo.).

The 0.25 tax would be levied on stock, futures, derivatives and other transactions. The financial industry strongly opposes the tax and argues it would hurt the economy as it begins to recover.
Here's more.
I assume the "0.25 tax" is really 0.25%. There's no indication in the article of whether mutual funds and ETFs would be included in such a atax.

Anyway, this is at the very early stages and it probably won't happen. But it's an indication of things to come. I expect taxation of non-wage income to become a new growth industry.

W2R 12-01-2009 10:57 PM

Ugh. Sounds like that might impact actively managed funds. I am thinking that perhaps if the managers' stock purchases within the funds were taxed, the costs would be passed on. :eek:

I hope this idea gets dropped like a hot potato.

youbet 12-01-2009 11:14 PM

Quote:

Originally Posted by samclem (Post 880099)
It looks like several legislators are working on a proposal to tax equity trades......................I expect taxation of non-wage income to become a new growth industry.

Not to be morbid, but......... I sadly expect:

1. Higher tax rates on ordinary income.
2. Elimination of "breaks" on passive income such as LTCG rates and qualified dividend rates.
3. Wealth taxes, such as real estate tax and personal property tax, to be expanded to include monetary assets.
4. The AMT to impact more people.
5. State and local taxes to increase.
6. More means testing for entitlement programs such as SS and Medicare.

:(

yakers 12-01-2009 11:59 PM

per youbet:
Not to be morbid, but......... I sadly expect:

1. Higher tax rates on ordinary income.
2. Elimination of "breaks" on passive income such as LTCG rates and qualified dividend rates.
3. Wealth taxes, such as real estate tax and personal property tax, to be expanded to include monetary assets.
4. The AMT to impact more people.
5. State and local taxes to increase.
6. More means testing for entitlement programs such as SS and Medicare.

I would add, increased sales/VAT.

There may be better or worse ways to do things but there is a lot of debt to pay off and taxes will have to be raised somehow.

traineeinvestor 12-02-2009 02:51 AM

Several countries have this sort of tax already - usually called stamp duty - on property transactions and securities transactions. In HK we pay 0.1% on the sale and purchase of shares.

samclem 12-09-2009 08:16 AM

The legislation to tax stock transactions is apparently moving ahead. It was introduced last week in the House, and a version is being drafted for consideration by the Senate.

Here's one take on the likely impact of the legislation from a couple of people many here know: Malkiel and Sauter.

In part:
Quote:

The financial crisis was primarily a liquidity crisis and a credit crunch, and the major problem with collateralized mortgage-backed bonds was that they declined significantly in value and became illiquid. A transactions tax that would have reduced trading and made repurchase agreements more costly, could have made the problem even worse. Moreover, "Wall Street" would not foot the bill for the presumed $150 billion tax. In fact, the tax would simply be added to the cost of doing business, burdening all investors, including 401(k) plans, IRAs and mutual funds.
Some argue that high-frequency traders, who reportedly execute 70% of the equity market trades, would pick up the lion's share of the bill. But high-frequency traders are not villains—indeed, they play an important role in improving market efficiency.
Often mischaracterized as speculators, high-frequency traders scour markets for minor mispricings and arbitrage trading opportunities. They buy and sell stocks in an instant, hoping to earn pennies on a trade. Far from destabilizing or creating volatility in the market, their actions significantly increase trading volume, reduce spreads, promote price-discovery, and ultimately reduce transactions costs for long-term investors. Such trades might not be doing God's work, but they are socially useful.
. . .

Transactions taxes would make most current high-frequency trades unprofitable since they depend on the thinnest of profit margins. Trading volume would collapse, and there would be a dramatic shortfall in the tax dollars actually collected by the government. Market liquidity would decline, bid-offer spreads would widen, and all investors would pay significantly higher costs on their trades.


The U.S. has the broadest, deepest, most liquid and efficient capital markets in the world. This is why it can continue as the world's premier reserve currency nation despite consistent trade deficits. People are attracted to the our financial markets because of their high liquidity and low transactions costs. Efficient capital markets also benefit all individual investors who save and invest through 401(k)s, IRAs and other retirement programs. The transactions tax would gravely wound financial markets. It is hard to imagine a piece of legislation that would have more damaging unintended consequences.
Of course, what would these guys know about the stock market . . .

jimnjana 12-09-2009 08:42 AM

Quote:

Originally Posted by traineeinvestor (Post 880117)
Several countries have this sort of tax already - usually called stamp duty - on property transactions and securities transactions. In HK we pay 0.1% on the sale and purchase of shares.

Stamp Tax..."Stamp Act" doesn't that ring a bell... This will be fun to watch over the next year or so, right up to the next election cycle.

eridanus 12-09-2009 09:10 AM

Quote:

Originally Posted by samclem (Post 882174)
The legislation to tax stock transactions is apparently moving ahead. It was introduced last week in the House, and a version is being drafted for consideration by the Senate.

Here's one take on the likely impact of the legislation from a couple of people many here know: Malkiel and Sauter.

In part:


Of course, what would these guys know about the stock market . . .

These high volume traders are exactly the reason that the exchanges increased their fees and added new cancellation fees. The black-box platforms were slamming the exchanges with their bids and withdrawals and were overtaxing (har!) the systems. So, in effect, these traders increased trading costs for the average trader already.

Let's not be Chicken Little. The world won't end if these types of traders go the way of the dodo.

ziggy29 12-09-2009 09:11 AM

If this winds up hitting pension funds, AARP and the unions will kill it.

samclem 12-09-2009 09:39 AM

Quote:

Originally Posted by eridanus (Post 882189)
These high volume traders are exactly the reason that the exchanges increased their fees and added new cancellation fees. The black-box platforms were slamming the exchanges with their bids and withdrawals and were overtaxing (har!) the systems. So, in effect, these traders increased trading costs for the average trader already.

Let's not be Chicken Little. The world won't end if these types of traders go the way of the dodo.

If the exchanges instituted appropriate fees to cover the extra costs of these trades, then they aren't costing me anything. Like Vanguard's fees on briefly-held shares--hey, if the fees cover (or more than cover) the costs, then these folks are welcome to trade like demons and thereby reduce the costs to me.

Market efficiency is ultimately good for everyone. Taxes on trading reduce market efficiency. There may be offsetting "goods," but the case needs to be made. And if the evidence is "those people can afford it," then the whole idea needs to be closely examined.

eridanus 12-09-2009 09:57 AM

Quote:

Originally Posted by samclem (Post 882204)
If the exchanges instituted appropriate fees to cover the extra costs of these trades, then they aren't costing me anything. Like Vanguard's fees on briefly-held shares--hey, if the fees cover (or more than cover) the costs, then these folks are welcome to trade like demons and thereby reduce the costs to me.

Market efficiency is ultimately good for everyone. Taxes on trading reduce market efficiency. There may be offsetting "goods," but the case needs to be made. And if the evidence is "those people can afford it," then the whole idea needs to be closely examined.

The fees apply to everyone, not just the trading demons. If you, or your mutual funds, trade, you're paying the additional fees. The options cancellation fees didn't exist until the trading computers got out-of-hand. Now they affect everyone.

It's also questionable whether we want the "efficiency" that high-volume algo trading gives us. Google the VWAP study done by Quantitative Services Group. VWAP was pushed by Goldman, among other banks formerly called I-banks.

Finally, Warren Buffet supports the transaction tax. Of course, what does he know about the stock market...


(The transaction tax, as proposed, would be refunded for mutual funds.)

samclem 12-09-2009 10:15 AM

Quote:

Originally Posted by eridanus (Post 882210)

Finally, Warren Buffet supports the transaction tax. Of course, what does he know about the stock market...

WB has been in favor of lots of taxes lately. Since he now has more money than he can count, he's apparently decided the government can take some. He doesn't actually send them anything extra voluntarily, you understand, he just wishes they'd write laws to take it from him. And us.

M Paquette 12-09-2009 11:52 AM

For what it's worth, the bill, H.R. 4191, can be read here.

The bill imposes a transaction tax of 0.25% on stock trades, and 0.02% on futures, options, swaps, and credit default swap contracts. No tax is imposed on transactions in retirement accounts. No transaction tax is imposed on the purchase or sale of mutual funds (Sec 851 regulated investment companies) or fund derivatives.

The first $100,000 of stock transactions per year may result in the purchaser receiving a tax credit of the aggregate tax paid or $250 ($500 for joint returns) whichever is lesser. That is, you get your transaction tax refunded. (The transaction cap should really be inflation adjusted. Oh well...)

There's a clause to take the tax on transactions in facilities outside the US. No NASDAQ Grand Caymen...

clifp 12-09-2009 11:43 PM

I am dubious that this would collect a lot of money, because as the drop in volume would probably be substantial. That said I have heard worse ideas for increasing revenue which seems to be inevitable.

free4now 12-10-2009 01:36 AM

Keep in mind that the bid/ask spread is typically in the same ballpark as this proposed tax. Most people conveniently forget that the bid/ask spread is eating away at their portfolio with every trade, so even though this tax might not profoundly change the frictional costs of trades, it would profoundly change people's perceptions of those frictional costs, which could lead to significantly fewer trades among the less sophisticated, while the sophisticated folks who know how to minimize bid/ask spread continue with business as usual. Probably not a bad outcome.

clifp 12-10-2009 05:41 AM

Quote:

Originally Posted by free4now (Post 882504)
Keep in mind that the bid/ask spread is typically in the same ballpark as this proposed tax. Most people conveniently forget that the bid/ask spread is eating away at their portfolio with every trade, so even though this tax might not profoundly change the frictional costs of trades, it would profoundly change people's perceptions of those frictional costs, which could lead to significantly fewer trades among the less sophisticated, while the sophisticated folks who know how to minimize bid/ask spread continue with business as usual. Probably not a bad outcome.

I think the tax is considerably higher than the other transaction cost.

A typical trade for me is 1,000 share at $20 stock. My Schwab commission is $8.95 plus a few pennies for the exchanges fees call it $10. The bid ask spread most of the time is $.01/share and almost never exceeds $.02, even for mid cap stocks. So another $10 or $20 total. In contrast, .25% tax on $20K is $50.

If you have a $2 million stock portfolio (or ETF) and are primarily a buy and hold investor your may average 4 years holding period (roughly equivalent to Vanguard fund like Windsor or psst...) that is still $1 million in transactions and an additional $2,500 in taxes. However, the typical holding period for an active investor (or active mutual fund manager) is actually closer to 1 year. I know last year (in a very active year for trading) I bought and sold $1,500,000 which was roughly equal to my taxable assets. A fair amount of this was tax loss selling like selling a S&P 500 fund and buying VTI.

The bill project a $150 billion in revenue which is clearly large enough for Wall St to worry about, so I think this would have a big impact on the transactions/volume on the US stock exchange and we would see a rapid migration to other countries. Thus eliminating US jobs and an important export (financial services).

Since mutual fund trading is exempt from the transactions, I can see the creation of highly specialized mutual funds. E.g. a PC Operating system and application company fund, commercial airline producer fund, industry leading soft drink manufacturers, which would be bought and sold by sophisticated Wall St types,leaving the bulk of the taxes to be paid by unsophisticated folks like me and some other board members.

On the other hand if they did something like England with .1% tax and only charged you for selling not buying (similar to a conveyance tax) got rid of the mutual fund exemption than I might only scream a bit.

bosco 12-10-2009 11:17 AM

I realize that as Americans, we reflexively oppose all tax increases, and I don't like taxes any more than the next guy. But I think this bill has merit.

First, IRAs, Keoghs, etc. are exempted as I understand it.

Second, as I read the literature, the everyday investor (read you and me) is losing a lot more than .25% per trade due to high-frequency trading which this legislation opposes.

Are we so sure this is a bad idea? Most people on this forum don't strike me as frequent traders.

harley 12-10-2009 11:35 AM

So, if they don't want high frequency trading, why don't they just pass a law against it?

Implementing a tax to raise money is one thing. Implementing a tax to manipulate people's behavior is something completely different. Not to say it hasn't been done (ie. sin taxes), but I'm ALWAYS opposed to that kind of government interference. So if this is an attempt to raise money from the rich (or rather, people who trade outside of retirement accounts), fine. I'm against it, but whatever. It won't be the last. As long as the lawmakers build in exemptions for themselves (which they pretty much always do) or to placate their financial masters, I'll keep trying to take advantage of those opportunities to keep my money out of their hands. What else can you do?

Kwirk 12-10-2009 11:45 AM

Hey, you can't play poker in a casino without giving a little to the house...

FIREd 12-10-2009 11:46 AM

Quote:

Originally Posted by bosco (Post 882655)
First, IRAs, Keoghs, etc. are exempted as I understand it.

I don't understand this. A tax on trading will raise mutual funds' expense ratios. Whether your own that fund in an IRA/401K or in a taxable account, you'll be indiscriminately nabbed by the tax.


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