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.