Monday, December 21, 2009

Taxing Transactions a Terrible Idea

The Wall Street Journal must be desperate for stories this week. Today it ran an article that raises the specter of a tax on financial transactions proposed by the forthright Congressman Peter Defazio. This is a terrible idea, as I said when I first wrote about this in March for Financial News. I'm not sure why it is rearing its ugly head this week, unless the WSJ has the inside track on some progress on the proposal. Led by Congressman Peter DeFazio, eight US senators submitted proposed legislation to the House Ways and Means Committee proposing a 0.25 percent transaction tax on buying or selling stocks, futures and options. The proposed bill, known as H.R. 1068 or "Let Wall Street pay for Wall Street's bailout Act of 2009", was put forth on February 13th and is seeing fierce opposition from exchanges, trade associations and electronic communications networks alike. As I said in March, the bill could increase volatility, decrease liquidity, and decrease efficiency. The proposed quarter percentage tax, or 25 basis points, would be applied to the value of every transaction. If the average stock price is $20 per share, it would add 5 cents per share to both sides of the transaction. High frequency traders would be hardest hit as they operate on very thin margins, and comprise nearly 70% of daily volume.
This could be a stealth move, designed to make Main Street happy because it will think that only Wall Street will pay, one that could lead to the demise of HFT. The truth of the matter is that Wall Street will be able to figure out how to get the 10 cents back, Main Street traders (that's you and me) will not. Once again the government is trying to interfere in something of which it has no knowledge. It is a dangerous game.


  1. Quite true. Main Street doesn’t realize how badly they will get hurt by this. As a result, demagogues like Peter DeFazio can exploit this ignorance and fan flames about “making Wall Street pay” while doing nothing of the sort. In one way or another, Wall Street will find a way to circumvent the tax or simply pass the cost down to the retail customer (all of us).

    Additionally, DeFazio keeps using the example of the UK and how their securities market still functions despite the presence of a transaction tax. What he fails to tell anyone is that market makers are all exempt from this tax. For the markets to function properly there is a very real possibility that the market makers in the US will get a similar exemption. If this happens, then how exactly is this making Wall Street pay?

    Save Us From World Improvers

  2. you are 100% correct Melanie