RSS Feed MenuSome Democrats in Congress and their Big Labor allies at the AFL-CIO are pushing a tax proposal intended to reduce stock market speculation. The tax, sometimes referred to as a “Tobin Tax”–although it differs in important ways from the tax on international currency speculation that Noble laureate James Tobin proposed in the 1970s—would place a charge of about 10 cents per $100 on every stock transaction. The idea sounds good in some respects but it would actually make things much, much harder for individual investors.
The tax’s proponents actually have a few decent arguments in its favor. Average investors in individual stocks would not really feel the impact from the tax — deep discount retail brokers like E-Trade and Scottrade would probably just eat the tax amount on most trades — and tax would, nonetheless, raise a significant amount of revenue. Volatility of some stock prices (which, some would argue is bad) would also decline. The most direct, immediate consequences, furthermore, would be felt largely by the wealthy who engage in large scale speculation.
But the tax would have one enormous downside for average Americans: many exchange traded funds (ETFs) — mutual funds that trade all day long on stock exchanges and charge rock bottom management fees — would become nearly impossible to sell quickly and would probably vanish from the market. ETFs, by virtue of their low fees, have become a very popular vehicle for individual investors and are found in about a third of retirement plans (more than half of those newly opened). As with other mutual funds, they are designed to be held for the long term. In fact, because buying and selling them involves up front commissions, they’re superior to ordinary mutual funds only if held for a reasonably long time.
Speculators, however, make it possible for the funds to exist and make the market for selling them. A very common hedge fund strategy involves buying both an ETF and the stocks that it contains. The fund them attempts to make money by exploiting tiny differences between the value of the fund and the underlying stocks. (Traditional mutual funds price only once a day making this strategy much harder to work out with them.) Thus, hedge funds and other speculators make ETFs liquid. Even a tiny tax on this type of activity would probably make it more-or-less impossible for hedge funds to provide ETF liquidity. Individual investors might still provide liquidity for very common ETFs that track things like the S&P 500 but large numbers of people would be stuck with valuable assets in their retirement plans that would be very difficult and expensive to sell. Thus, the proposal seems likely to harm lots of small investors.
The “Tobin Tax” being proposed imposes transaction costs for no valid reason. It’s an awful idea.
midcon // Sep 4, 2009 at 3:06 pm
Agreed, the Tobin Tax is an awful idea. And the nuggets in this piece might be – Speculators cause problems for average Americans and create instability in the market. There should be some regulation of the financial and trading markets to promote stability and the pursuit of economic gain by both business and investors.
As a flat taxer who favors taxing all people for all income regardless of the source, it would seem to me that taxing profits from stock transfactions or EFT is both legitimate and appropriate. I recognize that this not what the article is about but I believe it is relevant.
JS // Sep 4, 2009 at 5:25 pm
Maybe I’m not a math whiz, but how are retailers going to eat this tax, exactly? E*Trade charges $9.99 for a stock trade, and this tax would add $50 to the cost of buying 1000 shares of a $50 stock. So how are retailers going to “eat this cost”. They won’t eat the cost, they will pass it on to consumers. And those consumers will drastically curtail their activity because of the necessity to pay commission fees that are now SIX to TEN times higher including the tax. This will drive a lot of retailers out of business. This tax is by far the stupidest idea I have ever come across. It has no benefits whatsoever, and may not even end up being revenue positive after you take the drastically reduced trading volumes, lowered capital gains revenues, and associated job losses into account.
sinz54 // Sep 4, 2009 at 6:01 pm
The original purpose of the Tobin Tax was to fund a single-payer system.
http://www.wpasinglepayer.org/
It’s just more evidence of what the liberals have been planning.
And giant funds like Fidelity Magellan, that have computerized portfolios of hundreds of stocks, would be hurt badly by a tax on every stock transaction.
No Tobin tax.
If the liberals really want to tax “speculators,” then they should tax those investments that are unique to speculators, like speculation in energy futures (which ultimately brought down Enron). Dem. Rep. DeFazio has proposed something like that. Taxing speculation in derivatives would be far less likely to hurt the average American’s investments than trading in the type of stocks that are contained in typical mutual funds.
SFTor1 // Sep 4, 2009 at 7:54 pm
It seems to me that it is the predatory nature of the stock market itself that has hurt small investors the most. I am sure we all remember Jim Cramer’s CNBC interview, where he openly admitted to using illegal practices to manipulate stock prices.
The proposed tax would penalize active trading, and have little influence on your typical small buy-and-hold investor.
Is everybody sure this is such a bad thing?
ltoro1 // Sep 5, 2009 at 12:39 am
This is a stupid idea that is more likely to increase instability than to decrease it.
TAXPREY // Sep 5, 2009 at 9:05 am
This tax will stop 90% of financial activity as it will become unprofitable and move it offshore. That’s the whole point, right? We have lost every sector to the world except for finance, now this will be forced off. Tax proponents claim the financial sector is one quarter of the economy and they want to see it destroyed. Loons.
Proponents of this tax claim hundreds of billions in revenue will be gained annually. The Independent Budget Office of New York City determined that a much smaller transaction tax would result in net negative revenue. The higher the tax, the lower the revenue with hundreds of thousands of jobs lost, most of them not even directly related to finance.
Read about what happened to Sweden. The Canadian government’s Staff of the Parliamentary Research Branch did a comprehensive study on the transaction tax in the few remaining countries that actually still have or had the tax. Conclusion of their study: “Sweden, on the other hand, appears to be a classic example of an experiment gone wrong, while Germany, like many other countries, has decided that the costs outweigh any benefits from this type of tax.”
Mutual funds, money managers make a round turn of a buy and sell at least once per year, many quarterly. You know how taxes start out small and keep increasing. Ecommunist Dean Baker has been proposing a 0.25% tax on a buy and sell of stock or futures. That alone is 0.5% loss annually. Baker said shrinking the financial sector will result in commissions and fees to be in line with the early 80’s. I remember $100 commissions. Bid-ask margins will be 50 cents as opposed to 1 or 2 cents per share. I see a loss in yield easily in excess of 1% annually. Any retirement calculator on the net shows that tiny loss will result in losing one third of your retirement over a lifetime of investing. That could be hundreds of thousands lost for someone starting to save in their twenties.
midcon // Sep 5, 2009 at 10:21 am
3 sinz54 // Sep 4, 2009 at 6:01 pm said “The original purpose of the Tobin Tax was to fund a single-payer system. http://www.wpasinglepayer.org/”
Sinz, could you please explain how you made a connection a connection between the original Tobin Tax theory or the current tax proposal that resembles a Tobin Tax and a single payer health care system? Is it simply that a single payer system needs revenue and the tax generates revenue, therefore the purpose of the tax must be to fund a single payer system? I kind of at a loss here? I don’t get it. Is “revenue” the connection?
djnichol66 // Sep 5, 2009 at 11:46 am
Please. Buying stock is speculation.
ltoro1 // Sep 5, 2009 at 1:07 pm
Oh by the way, speculation is not evil.
joedee1969 // Sep 5, 2009 at 2:37 pm
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http://americaspeaksink.com/the-conservative-reconstructon-project/
sinz54 // Sep 5, 2009 at 3:14 pm
sftor1:
Do you understand how a mutual fund works?
When you “buy and hold” a mutual fund, the fund manager is buying and selling stocks out of the fund’s portfolio all the time. For a fund like Magellan, which has hundreds of different stocks, buying and selling goes on frequently.
Any tax imposed on the fund for buying and selling stocks, would be added to the fund’s expense ratio, which YOU pay as an overhead charge when you invest in the fund.
So the tax would fall on every investor in mutual funds indirectly–the tax would be passed on to the investor in the form of a higher expense ratio.
sinz54 // Sep 5, 2009 at 3:15 pm
midcon:
Proponents of a single-payer system, going all the way back to the 1990s, proposed a 0.25% tax on every stock transaction to fund the system.
This includes Physicians for a National Health Care System.
midcon // Sep 6, 2009 at 9:03 am
I looked all over the Physicians for a National Health Care System and could not find a single reference to paying for a single payer system with a stock transaction tax. If you could provid a specific reference it would be great. I must admit I have never heard of this group. Although small, they apparently are fairly profressional. Note that I am not advocate of a single payer system. I just like to know is on the table so that I can make intelligent decisions.
But the real topic in this thread is a tax on stock transactions and according to Lehrer, the downside for individual investors essentially bois down to the difficulty in selling EFTs if a transaction tax is imposed. I’m not sure I would agree with that assessment because if an index or EFT has consistently gained value over a long period, individual investors are going to want into the fund. A closed fund such as Berkshire Hathaway comes to mind as something most investors would like to get into but can’t. Program trading and speculation increase volatility in the market. A Tobin type tax may be a tool to reduce that volatility. I wish more ink were being spent on things like the unbelievable Earned Income Credit (EIC) that apparently everyone just accepts in a ho-hum manner when it is simply income redistribution and welfare masquerading as a tax credit.
yoctobarryc // Sep 8, 2009 at 8:58 pm
I think the general consensus here on this page is that taxing stock transactions is a bad idea. I agree. A tax would encumber liquidity and would probably not do much to reduce noise trades. And after all, what harm do all those trades do to society? Who cares whether stock prices fall or rise in the short run? They don’t do much harm to anyone – except burn the traders causing the volatility.
My only complaint is that this article doesn’t do justice to the notion of the Tobin Tax. The Tobin Tax was a special case, as it applies only to foreign currency trades. The point is that foreign currency stability is essential to the economic health of nations in a way that the shares of big companies are not. In the same way we seek stability in inflation, we should avoid large swings in currency prices. Why? Because such swings create unnecessary volatility and uncertainty for companies, making it difficult to plan for the future, hampering growth and preventing job creation.
A Tobin Tax would try to stabilise the market. How? By making it more expensive to speculate, we will reduce such frivolous bets. Instead, people who are making sensible, prudent business decisions to import/export goods, will be able to benefit, and they will be able to handle the increased transaction cost because they are making profits from trades. At the moment, something like 90% of all Forex trades are speculative. And currencies often dive or soar for no apparent reason, explicable only by the emotions of speculators. Stabilising Forex prices would mean more trade. And more trade means in general healthier economies. A Tobin Tax means foreign exchange prices could track more accurately good old demand and supply for foreign and domestic goods, instead of investor’s hopes and dreams. In short, we tax Wall Street traders to help out the Main Street grocer who buys his speciality products from abroad.
Taxing stock trades seem an ill-thought out idea. But it is not the Tobin Tax. The Tobin Tax is for foreign exchange only. So please don’t mix the two.