Tax on stock trades being considered

[george76]

This is kind of funny, and actually probably closer to 180 degrees opposite of the truth. The illiquidity was a result of poorly designed and highly leveraged transactions. Once a security is trading at 20 cents on the dollar, an additional $0.0025 charge isn't going to have much of an impact on whether someone is willing to buy it or not. But conversely, a $0.0025 charge on each of the various transactions needed to put one of these complicated deals together, may have prevented them from getting done in the first place. The reason that these deals used so much leverage is that the margins were skinny. They needed the leverage to make it worthwhile. A small tax like this may have totally depleted whatever margin was there and made them completely uneconomic from the start. So rather than making the crisis worse, the tax may have prevented it from happening at all.

Sure. But then why tax all equity transactions? Why not limit it to the transactions involving derivatives, which is what ultimately caused the economic collapse. Equity transactions had nothing to do with it.

Here's an analogy of what seems to be going. Somebody violated curfew. And to resolve it, our solution is to burn down the entire neighborhood.

Once the tax is implemented, volumes will drop, which will cause bid ask spreads to widen. Once they widen, everybody will be hit with worse prices, higher mutual funds fees.

The retail industry stock industry has come out against this for good reason. If you today were to buy $25,000 worth of stock from Scottrade, it would cost you $7. But, with this tax, you would now have to add the following:

$25,000*0.0025 = $62.5

So $7 + $69.5 = $76.50. $76.50 instead of $7.

There will be lots of jobs lost from companies such Scottrade, Etrade etc. I get the "punish Wall Street" mantra. But this tax would not do much to punish Wall Street. It would punish Main Street.

 

[george76]

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.

Yes, they claim that they are exempted. But in reality they are not. Once the tax is implemented, volume will for sure drop. Either volume will move to foreign exchanges, or simply disappear. Once that happens, the spreads between bid and ask prices will widen. For many stocks today there might just be a penny difference. Many years ago, the spreads were 1/8, 1/4 or even greater. We are likely to see those types of spreads once again if this tax is implemented.

The increased spread will be charged to the mutual fund holder in form of an increase to their the regular fee. I hope nobody is under the illusion that the mutual fund will eat this cost.

So, it won't really matter if you are a frequent trader or not.

Perhaps this bill should be renamed "Rewarding Wall Street by Punishing Small Investors for Big Banks' Mistakes".

 

[Gone4Good]

Sure. But then why tax all equity transactions?

As I understand it, the intention is to tax all financial transactions. The idea is similar to the one floated by James Tobin to discourage disruptive currency speculation. The central tenet is that rampant financial speculation is bad and can destabilize the financial system. A tax on short-term trading would reduce "undesirable" hot money flows.

Those of us who buy and hold would be relatively unaffected. And the higher taxes from such a proposal would not nearly offset the significant tax benefits currently afforded capital gain and dividend income relative to the much higher tax burden imposed on earned income.

 

[george76]

As I understand it, the intention is to tax all financial transactions. The idea is similar to the one floated by James Tobin to discourage disruptive currency speculation. The central tenet is that rampant financial speculation is bad and can destabilize the financial system. A tax on short-term trading would reduce "undesirable" hot money flows.

Those of us who buy and hold would be relatively unaffected. And the higher taxes from such a proposal would not nearly offset the significant tax benefits currently afforded capital gain and dividend income relative to the much higher tax burden imposed on earned income.

The proposal in both Senate as well as the House include stocks. Here's per the link in the original posting of this thread:

"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."

By the way, we had a similar transaction tax during the crash of 1929. So, such a tax would not be a magic bullet. Instead, what they should focus on is going after the margins and the type of leverage that speculators are allowed to get. Then again, I doubt their motive is to go after the speculators. If that truly was their motive they wouldn't go after all equity transactions. I think they are simply trying to find yet another new revenue source. And considering all the unintended consequences of this proposal, there gotta be better ways to balance our budget.

By the way, you mentioned that buy and hold investors would be relatively unaffected. It depends on what type of buy and hold investor you are. If you are simply holding a mutual fund, you are highly unlikely to escape this as you are likely to be passed on higher fees.

 

[samclem]

And the higher taxes from such a proposal would not nearly offset the significant tax benefits currently afforded capital gain and dividend income relative to the much higher tax burden imposed on earned income.

Huh? Not relevant. What has the difference in tax rates between CG and earned income got to do with this?

But, we can discuss the pros/cons of the CG rate vs earned income if you like. Let's start with some discussion of why cost basis isn't indexed to inflation.

 

[Gone4Good]

Huh? Not relevant. What has the difference in tax rates between CG and earned income got to do with this?

For one, it's [-]hard[/-] unseemly for someone benefiting from an exceptionally good deal to complain when their deal becomes slightly less good.

Second, it's not clear to me why passive income should be treated more favorably than earned income. Right now it is, massively so. Are we really saying that as a matter of public policy we want more investment and less labor? That is how our tax incentives are structured. If you want to equalize those rates and let the market figure out what we need more of, either labor or capital, than you've got a long way to go from where we are now. A .0025% transaction tax doesn't even scratch the surface.

 

[FIRE'd@51]

As I understand it, the intention is to tax all financial transactions.

If this is the case, the tax would basically wipe out the Treasury bill market, as a 0.25% tax is greater than these securities currently yield.

With regard to derivatives, the tax would be particularly onerous if it were applied to the notional amount. For example, it could significantly cut the returns on many popular options strategies, such as writing covered calls.

 

[samclem]

For one, it's [-]hard[/-] unseemly for someone benefiting from an exceptionally good deal to complain when their deal becomes slightly less good.

It's not a "good deal." It's "the deal" and if we are going to change the deal it makes the most sense to discuss that on its own merits, not compared to some other unrelated tax rate on another type of income that is treated separately in the tax code.

Second, it's not clear to me why passive income should be treated more favorably than earned income. Right now it is, massively so. Are we really saying that as a matter of public policy we want more investment and less labor? That is how our tax incentives are structured. If you want to equalize those rates and let the market figure out what we need more of, either labor or capital, than you've got a long way to go from where we are now. A .0025% transaction tax doesn't even scratch the surface.

At the risk of implying logic in the writing of our tax laws (where little evidence of such exists), not all taxes are designed to encourage some behaviors and discourage others. Do we tax low income earners at lower rates because we want to encourage people to earn less?

The lower rates on cap gains serve to encourage the investment of capital needed to build businesses (and the formation of jobs that come with them). Regarding the market for labor and capital: I'm not clear on how a higher CG rate would favor labor. I do see how a lower CG rate helps encourage job growth.

 

[clifp]

Lest we forget this tax is designed to raise revenue and lots of it $150 billion per year. Eliminating the illegal/unethical front ending trading isn't the goal of the legislation, it is to punish Wall St. Since I believe the financial IQ of the average Wall St type is way way higher than the average financial IQ of Congressman I have severe doubts that it work as intended. The bill's sponsor DeFazio (D-OR), is my Mom's congressman much to her dismay and pretty much an idiot.

Even if the trade volume remain the same (or don't flee overseas). This would still raise the expense ratio of even conservatively managed mutual funds. For example Wellesley ER would increase from .25% to .38%, Vanguard Windsor .30 to .58%. Fidelity Magellan .71% to 1.05% due to the transaction tax. The ER of index funds would also rise but a pretty minor 3 to 5 bias points. Still a million $ portfolio of funds like this is paying an extra couple thousand a year in taxes/expense. An amount which is likely to be at least as much as we would see due to higher income tax or raising LTGC from 15-20%.

Derivatives such as options are taxed at a lower rate .02%. However it is still a fairly large tax so if I sell 10 covered calls on $50 stock @ $.50 a contract, right now my profits is $500 less the $15 in commission cost, I would now owe an additional $10 in taxes.

 

[deserat]

I thought the main reason for the 'collapse' was that the true risk of the derivatives was covered up - i.e. the ratings given were false, so people thought they were investing at a certain risk, when in fact they were investing at a much higher risk. How does a tax on transactions help a problem of misinformation or disinformation?

I agree with the posters that say this is another way to generate revenue for desired government projects. Unfortunately, the 'rich' aren't the only ones that are going to be affected by this - over the years, the strategy used for retirement savings has evolved to one which is based on people having their own independent holdings in the market - as they buy-in to build assets or sell-out for income during retirement, this will affect them. To say this tax will inhibit the behavior that brought on the 'collapse' in the first place is disingenuous.

Second topic - thanks to the poster who brought up the millisecond 'jump' for high frequency trading - that is a 'foul' and should be stopped. Although with technology one finds barriers are usually jumped or gone around once put in place. It is very hard to stop the progression.

 

[Independent]

Oh, high frequency trading is much more bizarre than that. High frequency trading is done by computer, using algorithms (pre-planned strategies and tactics, basically) to hunt for "signals" (triggering actions, typically specific stock price and volume fluctuations) and execute trades in microseconds.

High frequency trades are so time-sensitive that the computers running the trading algorithms are co-located in the exchange's computer facilities, as the hundreds of microseconds of delay as data is routed and switched to corporate data centers in nearby buildings would delay the trades too much to let them be profitable. Renting this space is very profitable for the exchanges.

One of the more suspect tricks this permits is a form of front-running, or getting an order onto the exchange microseconds before a customer order so as to move the price to the detriment of the customer. That's something the SEC has been asked to look at.



Karl Denninger wrote up a nice explanation of how this works:

Let's say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer will accept any price up to $26.40.

But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their "flash orders" (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) "immediate or cancel" orders - IOCs - to sell at $26.20. If that order is "eaten" the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become "more efficient."

Thanks for the response. The front-running example seems like a very clear case of the high-frequency trader hurting the long term investors. It looks like this tax would make it unprofitable (I'm not saying that it shouldn't be banned even if the tax doesn't pass, but the tax is a different way of getting the same favorable result).

Your first paragraph says there are a lot more strategies. Do you have an opinion on whether they are a net positive or negative to long term investors? (The claim I quoted is that high-frequency traders are a net positive for the rest of us.)

 

[george76]

A .0025% transaction tax doesn't even scratch the surface.

Just for the record, it is a 0.25% tax, not a 0.0025%. In reality this would make an average commission 10 times what it is today at your regular discount broker. I would be chocked if our retail stock industry even remotely would have a chance to survive this tax.

So, to claim that this tax won't even scratch the surface seems far fetched. I have a friend who works at Schwab who is worried about losing his job because of this tax.

 

[Independent]

Yes, they claim that they are exempted. But in reality they are not. Once the tax is implemented, volume will for sure drop. Either volume will move to foreign exchanges, or simply disappear. Once that happens, the spreads between bid and ask prices will widen. For many stocks today there might just be a penny difference. Many years ago, the spreads were 1/8, 1/4 or even greater. We are likely to see those types of spreads once again if this tax is implemented.

The increased spread will be charged to the mutual fund holder in form of an increase to their the regular fee. I hope nobody is under the illusion that the mutual fund will eat this cost.

So, it won't really matter if you are a frequent trader or not.

Perhaps this bill should be renamed "Rewarding Wall Street by Punishing Small Investors for Big Banks' Mistakes".

Can you explain why bid-asked spreads widen? And by how much?

In my (simple) view, high-frequency traders stand between two long term investors. They buy from one and sell to the other. In order for the hf trader to cover his expenses plus make a profit, he has to have some mark-up on the total buy-sell roundtrip. My gut feeling is that markup must be more than any transaction efficiency that could get captured by long term investors.

Maybe you can make a good argument that it isn't, but I'd want to see the specifics.


Regarding the "lose jobs" argument, we have that for virtually all taxes.* In general, if you tax something you get less of it. In a very few cases we actually want that result (taxing cigarettes), but it's usually an unfortunate byproduct. So does a financial transaction tax do more harm to the economy than an increase in taxes on labor income?

Some jobs produce positive externalities, some negative, and some are pretty neutral. The proponents of this tax suggest that we'd be better off if some of the very bright people on Wall Street (or in classrooms at Harvard) decided that their futures would be brighter in some other line of work, maybe one that generates those positive externalities. The opponents of the tax claim that HF traders are already doing the rest of us a lot of good. Hence, I'm asking for the step-by-step explanation of how I benefit from this activity.


*(In fact, we see that argument used against efficiency gains, too. For example, if the bid/asked spread went down, did that cost people jobs? If so, was it a bad thing that we should reverse? I'm guessing the answers are "Yes" and "No". I don't think that any job loss is bad.)

 

[george76]

Can you explain why bid-asked spreads widen? And by how much?

With many more market participants we are likely to have a more efficient market. As an example look at what we had in the 1960's where the bid ask spread was 1/8, 1/4 or wider. Because of technology, discount brokers, 401ks etc we have a completely different market place than we had 50 years ago. We have many, many more participants. As a result, we no longer have the wide bid ask spreads as we had then. If most of these participants disappear (which even the proponents in Congress acknowledge), we are bound to see a market place that we had 50 years ago again and thus a less efficient market. I hope my explanation makes sense.

Regarding the "lose jobs" argument, we have that for virtually all taxes.* In general, if you tax something you get less of it. In a very few cases we actually want that result (taxing cigarettes), but it's usually an unfortunate byproduct. So does a financial transaction tax do more harm to the economy than an increase in taxes on labor income?

Some jobs produce positive externalities, some negative, and some are pretty neutral. The proponents of this tax suggest that we'd be better off if some of the very bright people on Wall Street (or in classrooms at Harvard) decided that their futures would be brighter in some other line of work, maybe one that generates those positive externalities. The opponents of the tax claim that HF traders are already doing the rest of us a lot of good. Hence, I'm asking for the step-by-step explanation of how I benefit from this activity.

I'm guessing we are talking apples and oranges. I think the proponents want to punish "Wall Street" (whatever that is). But in their eagerness to do so they, with this tax, are also punishing Main Street. The brokers at Scottrade, who may have a branch down at the downtown mall in middle America, would likely lose their jobs if their commissions would jump 10 fold.
I don't get why. Why not instead directly go after what caused the problems the last couple of years. Why declaring war on people that had absolutely nothing to do with it? And why would it benefit society to no longer have Etrade, Schwab etc. Or to make a greater point; we have the best stock market in the entire world. It is something we should be proud of. Why would we voluntarily relinquish that title?

Finally, take a look at Sweden. They implemented their transaction tax back in 1984. They abolished it less than 8 years later. Why? Because volume left Sweden or just disappeared. Sweden still hasn't recaptured all their volume that they lost. While Sweden is not the US, the principle applies. Unless every country on the planet agrees to the same tax, it will not work.

 

[Lsbcal]

Any ideas on who to email in government to voice objections to this 0.25% tax idea? Maybe just our state's senators? I did find this link: http://www.govtrack.us/congress/bill.xpd?bill=h111-1068
Hopefully the bill will go nowhere.

If the tax were maybe .0025% I could live with it. My average ER is around 0.25% and I figure maybe 1 trade/yr on average. So 0.25% would double my ER, ouch.

 

[samclem]

If the tax were maybe .0025% I could live with it. My average ER is around 0.25% and I figure maybe 1 trade/yr on average. So 0.25% would double my ER, ouch.

While the direct cost of the tax looks bad enough, the indirect impacts seem even worse. Just the likely increase in bid/ask spread will significantly reduce the annual returns of mutual funds, whether they are held in IRAs/401ks or not.

Here's a Powerpoint presentation from a prof at Rutgers on the issue of Securities Transaction Taxes (STTs). Unfortunately, it has a lot of formulae and no notes pages to go with the slides. The author examined the impact of STTs in several places where they've been tried, including one imposed by New York State in 1976. Impact on the NYSE (see last slide):
-- STT and volatility directly related (i.e. the tax increased volatility)
-- STT and liquidity were inversely related (i.e. more tax=less liquidity)
-- STT and market share inversely related (i.e. more tax= less business for the NYSE, stock volume moved to exchanges out of NY state. In the case of a US-wide STT, the implication is that foreign exchanges would benefit at the expense of the US.)

 

[george76]

Any ideas on who to email in government to voice objections to this 0.25% tax idea? Maybe just our state's senators? I did find this link: H.R. 1068: Let Wall Street Pay for Wall Street's Bailout Act of 2009 (GovTrack.us)
Hopefully the bill will go nowhere.

If the tax were maybe .0025% I could live with it. My average ER is around 0.25% and I figure maybe 1 trade/yr on average. So 0.25% would double my ER, ouch.

I would contact your three representatives in Washington. I have been told that calling them or snail mailing them is more effective than an e-mail.

By the way, I did just that. My Republican rep said he was against it while my two Democratic senators were both undecided. But they do keep track of the calls and where we people stand so I do think it is worthwhile.

 

[Independent]

With many more market participants we are likely to have a more efficient market. As an example look at what we had in the 1960's where the bid ask spread was 1/8, 1/4 or wider. Because of technology, discount brokers, 401ks etc we have a completely different market place than we had 50 years ago. We have many, many more participants. As a result, we no longer have the wide bid ask spreads as we had then. If most of these participants disappear (which even the proponents in Congress acknowledge), we are bound to see a market place that we had 50 years ago again and thus a less efficient market. I hope my explanation makes sense.

I'm guessing we are talking apples and oranges. I think the proponents want to punish "Wall Street" (whatever that is). But in their eagerness to do so they, with this tax, are also punishing Main Street. The brokers at Scottrade, who may have a branch down at the downtown mall in middle America, would likely lose their jobs if their commissions would jump 10 fold.
I don't get why. Why not instead directly go after what caused the problems the last couple of years. Why declaring war on people that had absolutely nothing to do with it? And why would it benefit society to no longer have Etrade, Schwab etc. Or to make a greater point; we have the best stock market in the entire world. It is something we should be proud of. Why would we voluntarily relinquish that title?

Finally, take a look at Sweden. They implemented their transaction tax back in 1984. They abolished it less than 8 years later. Why? Because volume left Sweden or just disappeared. Sweden still hasn't recaptured all their volume that they lost. While Sweden is not the US, the principle applies. Unless every country on the planet agrees to the same tax, it will not work.

My bold - I'm quite sure we wouldn't go back to the market we had 50 years ago. Computers have changed all businesses. Most of the compression is bid/asked is probably due to better information flow. Maybe you know better, but I see lots of changes other than volume.

I'd like to see the calculation of how taking out the volume of the "High Frequency" increases net costs for long term investors. That is, I'm guessing that any increase in bid/asked paid by long term investors is less than the savings of taking the HF markup out of the cost.

The bill (as I understand it) exempts the individuals who are trading with Scottrade, Etrade, and Shwab. Even if they weren't, a 25 bp charge on a stock that you hold for 4 years is 6 bp per year. I don't see why that would chase all the long term investors out of the market. OTOH, 25 bp on something you'll hold for a month is 300 annualized. The tax is more likely to reduce that kind of activity. Maybe you feel that these firms get most of their volume from short term traders?

I expect that some of the proponents of this tax, and some of the opponents, have motives I don't agree with. But that's true about any piece of legislation. The key to me is what it actually does.

"We have the best stock market in the world". Did you see M Paquette's example? I read that and wonder how many more examples there are that I haven't seen.

 

[george76]

My bold - I'm quite sure we wouldn't go back to the market we had 50 years ago. Computers have changed all businesses. Most of the compression is bid/asked is probably due to better information flow. Maybe you know better, but I see lots of changes other than volume.

Let me try this example instead. What is easier to buy and sell, a stock or a house? A stock and the reason being because there are many more participants than when trying to buy/sell a house. This tax will eliminate countless participants and by default you will have a much more illiquid market.

Unless you have market participants, it doesn't matter how advanced your computers are. Heck, even today there are stocks on the Nasdaq that have spreads that are wider than 1/4. Why? Because these are small, illiquid stocks with very few market participants. This tax would copy that environment to most major stocks and have wider spreads as well.

The bill (as I understand it) exempts the individuals who are trading with Scottrade, Etrade, and Shwab.

I don't think that's correct. As far as I know, the only thing that would be exempt are retirement accounts. But it begs the question, doesn't it, if this tax is so tiny and have no effect on anybody, then why the need to exempt retirement accounts? After all, we are told it is such a tiny tax.

At any rate, in reality nobody will be exempt. As samclem mentioned in his post above, research has shown that spreads will increase when this type of tax is introduced. And once they increase everybody will pay, irregardless of whether they are exempt or not.

Even if they weren't, a 25 bp charge on a stock that you hold for 4 years is 6 bp per year. I don't see why that would chase all the long term investors out of the market. OTOH, 25 bp on something you'll hold for a month is 300 annualized. The tax is more likely to reduce that kind of activity. Maybe you feel that these firms get most of their volume from short term traders?

Exactly. The short term traders provide the volume. Once you kick them out of the market, long term investors will get worse pricing via widen spreads. Sure, if you are holding ABC company for 6 years you won't see a charge until you sell the stock when you pay the tax/wider spreads. But if you are mutual fund holder, you will pay this tax as an increased fee on a regular basis.

"We have the best stock market in the world". Did you see M Paquette's example? I read that and wonder how many more examples there are that I haven't seen.

What I meant was that we have the most stocks in our markets in the world. They are the most liquid. There is no other country where corporations can raise capital in such an easy way as here in the US. Part of the reason is the liquidity in our stock market. Once you deny traders this liquidity, you are bound to make it harder for corporations to raise capital down the road. If they can't raise capital, then they can't buy equipment, hire people etc. Why would we want to go down this road where we are pushing investors/traders to foreign countries?

Finally, what most likely will end up happening is that companies such as Goldman Sachs, Morgan Stanley will be exempt from this tax as they are market makers and instead everybody else will pay. They have the lobbyists and can fight it, and I believe this is what was in the UK. How is that possibly fair?

 

[eridanus]

Impact on the NYSE (see last slide):
-- STT and volatility directly related (i.e. the tax increased volatility)
-- STT and liquidity were inversely related (i.e. more tax=less liquidity)
-- STT and market share inversely related (i.e. more tax= less business for the NYSE, stock volume moved to exchanges out of NY state. In the case of a US-wide STT, the implication is that foreign exchanges would benefit at the expense of the US.)

The last slide: "Regional exchanges – shares are fully fungible and the currency is identical between exchanges"

Since foreign exchanges don't have fungible shares, and there are currency issues, it doesn't follow that trading would off-shore. Hong Kong has -0- capital gains tax, yet the US has ample liquidity. Surely market share would've shriveled already? Saving >15%+ is a lot more incentive than saving <1%.

 

[Lsbcal]

Seems the regulatory legislation will probably satisfy congress's desire to do something about past disasters: http://www.nytimes.com/2009/12/12/business/12regulate.html?partner=rss&emc=rss

My guess is the stock transaction tax will go nowhere.

 

[M Paquette]

Your first paragraph says there are a lot more strategies. Do you have an opinion on whether they are a net positive or negative to long term investors? (The claim I quoted is that high-frequency traders are a net positive for the rest of us.)

They are a slight net negative for longer term investors, taking a cut of the action on buy and sell days. There's plenty of liquidity (trading volume) during each trading day from day traders and folks pursuing short term trading strategies.

I don't recall seeing any difficulty in the trades of index funds 10 years ago that might have been eased by these 'new and improved' high frequency activities introduced in the past decade.

 

[george76]

The last slide: "Regional exchanges – shares are fully fungible and the currency is identical between exchanges"

Since foreign exchanges don't have fungible shares, and there are currency issues, it doesn't follow that trading would off-shore. Hong Kong has -0- capital gains tax, yet the US has ample liquidity. Surely market share would've shriveled already? Saving >15%+ is a lot more incentive than saving <1%.

As was mentioned above, Sweden tried a similar transaction tax.

In January 1984, Sweden introduced a 50-basis-point tax on the purchase or sale of an equity security. In July 1986 the rate was doubled. With the 1986 announcement that the equity tax would double, 30% of the trading volume moved to London. By 1990, more than 50% of all Swedish trading had moved to London. Foreign investors reacted to the tax by moving their trading offshore while domestic investors reacted by reducing the number of their equity trades.
http://www.iimcal.ac.in/community/FinClub/art103.html

Why would the US be any different since investors can easily move to foreign exchanges? Unless this is agreed to by all countries, it would be unlikely to work.

Americans are taxed on their earnings on a worldwide basis, including capital gains. Thus, we couldn't simply move our trading to Hongkong to escape capital gains taxes. However, a hedge fund or other types of Wall Street firms can easily move their HQ's to Hongkong or wherever. But they are taxed differently than individuals. I assume what will happen in reality is that the "big boys" will either be exempt (as they are in the UK) or they will move abroad.

The 1% (or 0.25%) is per trade. So depending on how you invest, it can easily amount to much higher than 15%. This is why it would eliminate short-term traders as it would no longer make sense to trade on a ST-basis. And whatever people may think of ST-traders, they do provide liquidity in the market.

My 2 cents...

 

[Lawrence of Suburbia]

So, did Sweden finally get wise and dump the tax?

 

[samclem]

The last slide: "Regional exchanges – shares are fully fungible and the currency is identical between exchanges"

Since foreign exchanges don't have fungible shares, and there are currency issues, it doesn't follow that trading would off-shore. Hong Kong has -0- capital gains tax, yet the US has ample liquidity. Surely market share would've shriveled already? Saving >15%+ is a lot more incentive than saving <1%.

Foreigners living abroad pay no cap gains tax to the US if they trade on a US stock exchange.

What about the new proposed transaction tax? Here's a description of the "covered transactions":

‘(e) Covered Transaction- The term ‘covered transaction’ means any purchase or sale if--

‘(1) such purchase or sale occurs on a trading facility located in the United States, or


‘(2) the purchaser or seller is a United States person.

So, foreign nationals would pay the tax if the sale occurred on a US exchange, and US citizens would pay the tax no matter where the sale of stocks occurred (I wonder how the IRS will enforce this?)

Bottom line: The cap gains tax does not swamp the impact of the new tax. The new tax would reduce the attractiveness of US exchanges to foreign traders (and foreign companies).