Why Taxing Stock Trades Is a Really Bad Idea

Wall Street Journal – January 5, 2010

Everyday investors shouldn’t be punished for a subprime fiasco fueled by Fannie Mae and Freddie Mac.

By Donald L Luskin and Chris Hynes

You ever see an article and see the headline and think well, I don’t particularly care about that topic, but, the authors’ names catch your eye, so you read it anyway. This was that article. And then when I finished, I realized that the authors were total jackasses and completely fabricated their point of view and that instead of arguing coherently and bringing me around to their position, I was now resolutely against it. It made me so angry that I had to return to the The Melon after an extended sabbatical…

 

The Democrat-dominated Congress has come up with a new way for President Obama to violate his pledge to not raise taxes on families earning less than $250,000 per year. It’s a tax on securities transactions—trading in stocks, options, futures and so on.

 

And why not single out trading for special taxation? We levy special taxes on tobacco, alcohol and other vices. Except that trading isn’t a vice. The exchange and hedging of business interests is a virtuous—and utterly essential—activity in a free economy.

 

Apparently Messers. Luskin and Hynes aren’t aware that we tax more than just vices. We often tax income, gasoline, services, food, hell, we even tax suntan beds. If you buy a cell phone, there is a specific tax just for buying that phone, if you fly, there’s a specific tax just for your ticket.

 

But you’d never know it from the angry anticapitalist rhetoric of the tax’s proponents.

 

I love when idiots from the right call moderates anti-capitalists. If they were anti-capitalists, they’d want to end the existence of the stock market, you twits. They don’t. They want to raise money from it, BECAUSE IT ABOUT BANKRUPTED THE ECONOMY. The day you see DeFazio writing a bill that says “The New York Stock Exchange shall no longer exist” then you can call him an anti-capitalist.

 

Rep. Peter DeFazio (D., Ore.), who introduced the House bill establishing the tax—positions it as retribution for “the Bush administration’s cowboy capitalism, markets know best, deregulation at all cost policies.” Sen. Tom Harkin (D., Iowa), who introduced a similar Senate bill, says, “We need a shift in priorities in this country to ask not what America can do for Wall Street, but ask what Wall Street can do for America.”

 

Right on DeFazio! You go … older Oregonian Gentleman … who occaisionally sports an alarmingly awkward mustache.

 

Are you just an ordinary American who trades stocks? You probably don’t think of yourself as having much to do with “Wall Street,” or of your trading as a vice that ought to be singled out for a special tax. And you surely don’t think of yourself as someone who caused the recent financial crisis, which was, as Rep. DeFazio says, “brought on by reckless speculation in the financial markets.”

 

The reason most people, like myself, or those people who read this article don’t think of themselves as having much to do with Wall Street is that because they don’t have much to do with wall street. Less than 21 million households own free standing stock (not in mutual funds), which is less than 20% of America. In fact its worse than that, “Only 17 percent of households in the bottom 60 percent of the income spectrum own stock in taxable accounts.  In contrast, 73 percent of the households in the top 10 percent of the income spectrum own stock in taxable accounts.  Among those at the very top of the income spectrum — the top one percent — 84 percent own stock in taxable accounts.” This tax wouldn’t hit those below $250,000 income. Very few of them own stocks.

 

If anything, you probably think of yourself as a casualty of the crisis, not its cause. Why should a stock market investor like you—or for that matter, even an investor literally on Wall Street—pay a tax as punishment for a crime of which you were the victim, not the perpetrator? The crisis was caused by excesses in the mortgage industry, led by government-sponsored entities such as Fannie Mae and Freddie Mac. How did stock transactions—or transactions in options or futures—have anything to do with this crisis?

 

It is interesting that Hynes and Luskin purposefully avoid the true target of these new tax hikes. They are not meant to go on the average consumer. But they are meant to go towards High Speed Trades or High Speed Transactions. These are stock market trades made by computers in blinks of seconds trying to arbitrage prices, guess price moves as other computers trade. For example, let’s say that you, average investor, making $50,000 a year, decide to buy $10,000 of Microsoft stock, your broker places that trade order. The computers of these high speed traders will actually buy the stock – and then turn around and resell that stock to your broker in a blink of an eye, perhaps making one quarter of a penny on each stock sold, maybe less. But they do this millions of times a day, and make millions of dollars. By adding absolutely no value to the transaction. In fact, they are removing value because you are paying for that extra penny. And yet, they are taxed free.

 

Let’s dig into the rest of the that paragraph. First off, those companies that made the most money off of the mortgage crisis were not Fannie Mae and Freddie Mac, but the banks of Goldman Sachs, Morgan Stanley, Bank of America, Citi, AIG and other large financial institutions that repackaged loans and sold them on purposefully obtuse to the wretchedness of the investments they were selling. Those companies also dominate the trading on the stock market. They take orders from investors and execute the trades. They work with companies like Luskin’s and Hynes’ to sell and trade stocks using computers. They are making the profits, and the ridiculous horrible bets on mortgage companies. Fannie Mae and Freddie Mac only insure debt.

 

The proposed tax would apply to commodity transactions as well. So here we find another class of victims being punished. When excesses in the mortgage market blew up the world economy in 2008, commodity investors were hammered as prices plunged in everything from crude oil to gold to corn. Many of them were ordinary businesses—far from Wall Street—trying to hedge themselves against the rising cost of energy.

 

Cry me a river for lamenting the unfair plight of those poor speculators who drove the cost of oil up to $140 a barrel, just because they could. Those companies that are using arbitrage to price out commodities for future delivery won’t think this tax is all that much. But how much is that tax you ask? Well, why don’t we let these partisan hacks tell us:  If you were to buy or sell $100,000 worth of any stock or commodity the tax would be $250. Lordy lord! There is no way that American Airlines, or your local grain coop will be able to afford that tax of $250! on a bet of $100,000. That is DEBILITATING!

 

To be fair, the tax would apply to credit default swaps, which were closely associated with the excesses in mortgage speculation. But if it’s going to apply to stocks—which had nothing to do with the crisis except to be its victim—then why does the tax, as proposed by Rep. DeFazio, not apply to bonds? It was the bond market, not the stock market, that was the conduit for hundreds of billions of dollars of dodgy subprime mortgages. Could this possibly be related to the need for the federal government to issue Treasury bonds from here to eternity to finance the looming deficits from the cornucopia of programs being cooked up in Congress?

 

I don’t have a problem with this. Why the hell would the government tax itself?

 

Setting aside the critical issue of why certain types of securities are singled out for tax, and others are not, the tax as currently proposed does not even succeed in fairly targeting speculators as opposed to investors. In fact, like most tax schemes, it is riddled with arbitrariness and capriciousness.

 

Now you are just flat out lying. The tax specifically applies to trades over $100,000 then you are fine. How often does anyone you know whistle around trades of IBM for that much?

 

Suppose you buy a stock, and you hold the position for 20 years. You’re an investor. Suppose the person who sold it to you was a day trader—who might end up buying the stock again 10 minutes later from someone else and then selling it after an hour. You both pay the same tax.

 

You’re a joke! You pay the $250 tax (on a $100,000) trade when you sell it. They pay for their tax each time they make the buy or sell. Good job lying…again.

 

As proposed, you wouldn’t have to pay a tax to buy or sell mutual funds. Yet mutual funds themselves would have to pay the tax on any trades they make in stocks. So as the owner of the mutual fund, you still end up paying the tax. According to the Investment Company Institute, the average turnover for stock-market mutual funds in 2008 was 60%, which would add up to a lot of taxes.

 

You must fail at reading the newspaper in which you published this article:  ”The law would provide a $250 tax credit, effectively exempting everyone from the first $100,000 of all stock trades. And purchase and sale of mutual-fund shares would be exempt no matter how large, as would trading of assets held within personal savings accounts such as a 401(k).”

 

Transactions in retirement accounts would be exempted. So a corporation that invests to provide pensions to retired workers won’t face higher costs. But a retired individual who has just sold his business and is living off the invested proceeds will pay the tax.

 

See above

 

And don’t believe the proponents of the tax when the say it’s so small you’ll never notice it. At one quarter of 1%, that would be a cost of $0.33 on a share of IBM. If you were to buy or sell $100,000 worth of IBM (or any stock), the tax would be $250. Single taxpayers would get an annual exemption of that amount. But trade again, and you’re taxed $250. Again, another $250. Over and over. Each time, that’s about 20 times the commission that a typical online broker would charge you to make that trade—yes, the greedy broker, the one on Wall Street.

 

HAHAHAHAHHAHAHAHAHAHA.

Oh god, let me catch my breath.

HAHHAAHHAHAHAHAHAHA

 

More fundamentally, the proponents of the tax seem not to have thought through what effects it might have on America’s global competitive position as the world’s pre-eminent stock market. They simply wave away any concern with a flourish of moral indignation. Last summer, when Britain’s Financial Services Authority Chairman Adair Turner proposed a trading tax for the United Kingdom, and set in motion a global movement toward such a tax, he called trading “socially useless.”

 

We shouldn’t have to “socially” justify any lawful activity. But surely it is “socially useful” to let free people transact freely, without regulators and legislators micromanaging them. If anything, given the spectacular failure of every regulatory authority and legislator to detect and deter the abuses in mortgage markets that led to a near-meltdown of the global economy, it is their activities that would appear to be “socially useless” and deserving of a special tax.

 

I have no problem with the stock market acting. However, when the stock market and those on it take risks, when financial services companies put the future of the nation’s economic growth at risk, then I think that the society that creates a framework for them to exist has the right to tax them so that society can continue to exist.

 

It’s Economics 101 that the free actions of market participants cause supply and demand to reach equilibrium. And isn’t that what investors—indeed, even speculators—do? Don’t they try to buy things they think are cheap and sell things they think are expensive? Can they do it as well when facing the dead-weight costs of a transaction tax?

 

Ahhh, the false assumption that there is an equilibrium in a market. Someone hasn’t been reading their Minsky lately. The search for an economic equilibrium is a false search. Where is the equal point? Where does labor demand = the number of workers. At what point do prices for shoes equal the demand? If there is an equilibrium point, why is different at the same stores in the same city, or at across the nation? The demand is greater in Arkansas for product X than in Washington?

 

And yes, they can do it as well with that dead weight cost:  ”Great Britain, he said, currently levies a transaction tax that his higher than the one he proposes. `No one has fled London (stock market) because they’re paying twice what we’re proposing.” DeFazio also offered the support of British Prime Minister Gordon Brown, recently called for a global transaction tax.”

 

If not, then trading volume in our stock markets will fall. Beyond the tax, everyone—investor and speculator, great and small—who buys or sells stocks will pay more to transact in markets that are less liquid. And they will transact at prices that are not set as efficiently. In such a world, markets would necessarily be more risky, and the cost of capital for business would necessarily rise. The consequence of that is that innovation, growth and jobs would necessarily fall. That would be the full and true cost of the trading tax being proposed.

 

Oh shucks, some of the investment banks won’t be able to hire quite so many quants and they’ll be forced go into revolutionizing health care, or finding solutions to the carbon footprint. That is sooooo bad.

 

Mr. Luskin is chief investment officer at Trend Macrolytics LLC. Mr. Hynes is chief executive officer of Hynes Capital.

 

Ohhhh, that’s why you oppose this cost. Because YOUR taxes will go up. You are the idiots who will have to pay because your firms conduct thousands of these costs for your ridiculously rich clients daily. Tell the truth. This tax will never get anywhere near Main Street. This is a tax on the wealthy and your ridiculous friends.

 

Matt Stevens sells phones.