Thursday, February 19, 2009

The Proposed Securities Transaction Tax: Punishing the Wrong Group

I want to thank a number of readers who have raised the issue of the recently proposed securities transaction tax and its impact upon traders. The goal of this proposal is "To amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions to the extent required to recoup the net cost of the Troubled Asset Relief Program."

The bill indicates that "This Act may be cited as the ‘Let Wall Street Pay for Wall Street’s Bailout Act of 2009’". As many traders have pointed out, this is not at all a situation in which Wall Street would pay for its own bailout. Rather, ordinary traders who had nothing to do with the malfeasance associated with the securitization of questionable mortgages would be punished for the bailout of the offending organizations.

The bill explains that "This transfer tax would be on the sale and purchase of financial instruments such as stock, options, and futures. A quarter percent (0.25 percent) tax on financial transactions could raise approximately $150 billion a year." The net effect of taking 25 basis points out of every trade would be to put high frequency traders out of business and reduce the liquidity of markets. Capital would then flow out of the U.S. to exchanges that do not impose such taxes.

There is an online mechanism for writing your Congressional representative about this and other bills; shout out to Forex Factory for pointing that out and highlighting the issue. It may make sense to require the financial industry to recoup taxpayer bailout monies. Placing that burden on the backs of independent traders and threatening the liquidity of U.S. markets is not the way to accomplish that goal.


Joshua said...

I was just about to write you an email about this when this post popped up in my feed reader! Glad you are getting the word out.


Sami said...

Thank you very much for doing this. I appreciate all your hard work! I hope readers of this blog will take action and encourage others to also oppose HR 1068.

Sami said...

I would like to mention that there is a petition that can be sent for free to Congressional representative. Here is the link for it:


matty84 said...

Hey, I just found your blog through the Welcome to the Gutter blog, and I have to ask to make sure I says .25% on purchase and sales transactions. Does that mean it would tax the amount of money involved in the transaction, for example .25% of $5000 when you buy 100 shares of a $50 stock?

Jorge said...

Dr. Steenbarger,

These gentlemen are clueless, after all they're talking about taxing *activity*/liquidity, not profits or disruptive behavior.

There's already a 1 cent per contract tax paid for every futures transaction and a similar tax for stocks. This tax was supposed to pay for the supervision of, among others, the SEC to avoid fraud. Ahem... Raising that tax to two cents would already amount to a 100% tax hike, but a 0.25% on financial transactions? Sorry to say, but if the education of Mathematics hadn't been screwed up in the States (no offense meant, I've been there) for the last 3 decades, maybe Congress could crunch some numbers before making fools of themselves.

All the shoddy forex fixing, CFD ripping, warrant puking bucketshops of the world must be salivating.

Best trading - while you can,


OKL said...

The price we pay for not rejecting the bailouts, stimulus programs and countless alphabet soup programs.

Its too late... they will find a way to get those money back.

"If you don't agree these tax increases, the states will go bankrupt."

Welcome to America- Land of the Free and Home of the Brave... as long as you pay your taxes!

Btw, just so I get this out... the last time the government spent so much money was back during the depression, and the tax rates went to 80%.

Good Luck America!

MikeH said...

782 * 250 * .005 (round turn) = $975

It's going to be an awfully thin market. There might even be a more liquid market in Las Vegas real estate.

Stick Hansup said...

The Bush Financial Crisis happened in securities that are not even publicly traded, so how does this bill make any sense? No doubt any idiot congressman can make up a bill, but I seriously doubt anything this stupid could actually pass.


Richard said...

That sounds very similar to the 0.5% stamp duty that you pay when buying shares on the London Stock Exchange (it's not levied when selling). I think they have an exemption for "official market makers", who presumably have a monopoly on high-frequency trading.

Bill Henner said...

Thanks for bringing this to everyone's attention. I'm following you on Twitter and your content is great, but please be careful of the temptation to "overtweet"--no one likes a conversation hog.

Matt P said...

Obviously I'm am completely aghast that this legislative effort would garner any support at all. As an independent trader, it would weigh very heavy on my P&L...perhaps a change of profession would be considered. That said, my question is, who actually supports this bill...seriously? I would be very interested to know their true motives. If anyone knows, please share.

Seng said...

I am a foreign individual, and I chose to trade in the US markets because of the liquidity (NYSE is a much bigger market than my home country) and the opportunities.

I am sure many foreign individuals trade in the US markets for the same reasons too.

We have absolutely nothing to do with Wall Street's bailouts.

I'm sure many US traders have absolutely nothing to do with Wall Street bailouts.

Why punish the innocents?

The proposed tax will create more harm than good.

It will have a huge adverse impact on trading.

We will immediately see a reduction in trading volume and liquidity.

If this happens, I will most likely stop trading and return to my home country markets or go to other markets which don't have such taxes - 25 basis points per transaction is a LOT of money when active traders only measures their returns in similar sizes per trade.

Hopefully, someone in Washington understand this concept.

Brett Steenbarger, Ph.D. said...

Thanks all for the comments; the proposed tax, at .25% of all transactions, would be truly onerous to high frequency traders. Perhaps market makers would be excluded; that would still pose quite a burden to day traders and active investors. I do think it would cause a flight of capital outside the US and thus not raise the revenues anticipated--


Jim said...

Question re. the proposed Trader-Tax:

Hello Brett,

Would an individual who daily trades open-ended mutual funds (such as Rydex, Profunds or Direxion funds, priced daily at 4pm) be subjected to this proposed tax?

If so, what minimum holding period would be needed to avoid the proposed Trader-Tax?

Thanks for making your blog available.

wdfarmer said...

Thanks for the link! I just used it to send a message to my U.S. representative, detailing the impact this bill would have on my day trading.

Check my figures, but the way I figure it, if I bought 400 shares at $50, and sold them a few minutes later at $50.50, and paid a $8 commission each way, I'd have a profit of (400 x $0.50) - (2 x $8) = $184. H.R. 1068's maximum transaction value tax of 0.25% would tax that trade twice:

For the purchase, 0.25% x 400 shares x $50/share = $50 tax.

For the sale, 0.25% x 400 shares x $50.50/share = $50.50 tax.

Total tax = $100.50 on my $184 profit. That's a FIFTY-FOUR PERCENT (54%) tax on my profit, leaving just $83.50.

What's worse, is that if the trade went the other way, from $50.50/share to $50/share, my $216 loss would have the same tax applied to it, increasing the loss to $316.50.

So, a winning trade would earn me $83.50, but a losing trade would cost me $316.50. With odds like that, I'd have to be right 80% of the time to even make a little profit.

And of course, any profit I did make would be taxed as short-term capital gains, which for me would be typically 25%.

H.R. 1068 is just a bad idea. Independent work-at-home day traders like myself contribute a valuable liquidity to the daily functioning of the stock market. This bill would destroy our income: income which we pass along to our communities and local government when we purchase groceries, pay rent, or pay local taxes.


yphilj said...

If tax payers are expected to bail out investment banks, it only makes sense that the government needs the resources to effectuate the bailouts. England already has a similar tax (stamp tax). I haven't heard of any adverse effects. The proposed tax should be extended to the derivative markets and maybe should not be applied to long buys on stocks or bonds. There is too much gambling on Wall Street and it serves no good macroeconomic purpose.