Tax on stock trades being considered

[Lsbcal]

Before getting all worked up over this bill from a representative from Oregon we should keep this in mind:

Most bills never receive any committee consideration and are never reported out. House bills start in House committees and enter Senate committees only after being passed by the House and received by the Senate, and similarly for Senate bills.

 

[Rustic23]

isbcal,
While what you say is true, this is a congress desperately looking for cash, with a pension to tax just about anything they can think of. Restrict retirement accounts, so the 'little guy' does not get hit, and you can sell it at taxing the 'wealthy'. Sounds like it right out of their play book to me.

 

[george76]

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

Yes, after less than eight years, they dumped it. And per article:

once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.

By the way, EU is now discussing implementing this tax. France and the UK are driving it. From what I have read, Sweden is now ironically adamantly opposed to it based on its own experience. I say ironically as Sweden is not exactly known as a tax haven. But this is one instance where we can look to Sweden's experience for wisdom.

 

[samclem]

Before getting all worked up over this bill from a representative from Oregon we should keep this in mind:

There's already a companion bill being worked by Senator Tom Harkin (D) and Senator Bernie Sanders (I).

It's true that not all legislation makes it out of committee and through the process. It's also true that every terrible piece of legislation started just this same way.

 

[Independent]

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.




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.



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.





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?

I’m willing to accept the general direction – more trading means less cost per trade. But asked for numbers because I expect that the total cost goes up. I’ll try an example to show you what I’m thinking.

Market 1 is dominated by long term investors. A typical trade goes like this:

Investor A sells XYZ to market maker M at $50.00
Investor B buys XYZ from market maker M at $50.30
The $0.30 is the bid/asked spread. From A and B’s perspective, it’s frictional losses.

Market 2 has twice as many trades as market 1. Half the total trades are from short term traders. Due to the higher volume of trades, typical bid/asked spreads have dropped from $0.30 to $0.20. A typical trade between investors A and B looks like this:

Investor A sells XYZ to market maker M at $50.00
M sells XYZ to short term trader S at $50.20
S sells XYZ to market maker M’ at $50.35
M’ sells XYZ to investor B at $50.55

Notice that in Market 2 the volume of trades is higher, each bid/asked spread is lower, but the total frictional losses between investors A and B have increased from $0.30 to $0.55.

You may look at this and say “That’s not how it really works.” Fine, but I’m looking for an example with numbers that shows how it really works. In my world, S isn’t in the market at all unless he can cover his expenses and profit out of the difference between his selling and buying prices. That’s a drag on A and B that outweighs any value they get from additional liquidity.

I’m in favor of businesses being able to raise capital by selling stock. But note that the only time they get capital is when they sell new issues. Doubling the number of trades in the market increases liquidity, but by how much is that worth on a new issue? A new share that would have netted $50.00 to the issuing company now provides $50.01? $50.10?

In your last paragraph you say that giving market makers a pass isn’t “fair”. Could you explain this? Maybe the “fair” issue is between a “market maker” and a “short term trader”? I’m not sure if there is really a clear line between them anymore.

Regarding who’s exempt. I understand that this is in the “idea” stage. I got my information here

To ensure that the law targets speculators and not pension funds or retirement investors, the tax would be refunded for tax-favored retirement accounts such as 401(k) plans and education and health savings accounts. Additionally, the tax would not apply to the first $100,000 of a trader's annual transactions.

Financial transaction tax sought to pay for job creation - Dec. 2, 2009