There seems to be momentum on the hill to push for a small transaction tax on stocks. The proposal puts a 0.1% transaction fee on every order by total cost.
Consider this a sales tax, although instead of regressive, this puppy is progressive as well as more biased towards institutional large investors. (Hey flat taxers, by philosophy you should love this one!)
Because it is based on transactions, each time a security is bought and sold, those fees will add up on those who make large trades the most frequently. In other words, such a tax would target large hedge funds and institutions making profits off of slight fluctuations, such as those engaged in high frequency trading and derivatives.
In the Hill's article, AFL-CIO, Dems push new Wall Street tax, AFL-CIO policy director Thea Lee is quoted:
The big disadvantage of most taxes is that they discourage some really productive activity. This would discourage numerous financial transactions. People flip their assets several times in an hour or a day. They make money but does it really add to the productive base of the United States?
Oops, no more day tradin' fer you! Get out there and make somethin' you lousy Wall Street bum!
All kidding aside, the AFL-CIO wants the money to go to infrastructure projects. Now is that really the right allocation of such revenues, long term? Assuredly some real long term investments for the real economy are sorely needed, all E-Trade commercials aside.
This tax is estimated to generate between $50 to $100 billion a year....but we know the IRS. Once they get that revenue stream, is it possible to encourage more high frequency trades, simply to generate more tax revenues? Kind of like taxing smokers, or say property taxes....you might find yourself hoping more cigarettes are sold or home prices go up, just to continue to fill the coffers.
How about a transaction fee based on a time based frequency scale? 10 trades in an hour, 0.1%, 1000 trades in an hour on one stock, 10%....or even make some mathematical models to predict the probability of proprietary routing software or even speculation and tax accordingly! Now this will put a lot of computer programmers to work, figuring out the real profit margin, all the while dealing with a frequency based tax scale at least.
See, I can make up busy work for profit too!
Where is this stuff coming from? The Hill mentions the Tobin tax, which is a concept to deter currency speculation.
Representative Peter Defazio(D-OR-4th) wants to apply the same principle to oil speculation (remember that before the financial crisis?)
This idea of a transaction tax was proposed as an alternative bail out plan, which of course was dismissed since Congress was getting railroaded by Paulson and Bernanke.
DeFazio has introduced a bill, with 29 co-sponsors, to curtail oil speculation, again with transactional taxes. The Bill is H.R.3379, Title: To amend the Internal Revenue Code of 1986 to impose a tax on transactions in oil futures and options and to deposit the revenues from the tax into the Highway Trust Fund.
The bill puts a 0.2% transaction fee on oil futures and a 0.5% transaction fee on oil futures options.
The U.K. is already considering a transaction tax but notes that traders will simply move transactions offshore to avoid it.
The Curious Capitalist blog has a little background on transactional taxes. The most interesting thing is Sweden tried it and the result was it did push transactions abroad.
Myself, I'd like to try it, say in one area, such as DeFazio's oil speculation, an obvious market that affects the entire U.S. national interest and the economy as a whole. Would it work?
Could one try to get such disincentives adopted by the rest of the globe? Isn't this a general problem? The minute one nation attempts to encourage good economic behavior....the risk is that very business entity simply moves somewhere else. Ah, the race to the bottom for nation-states and multinational corporations run amok, playing one country off of the other ones.