market news and articles @ firstadopter.com

I call on the financial stock community blogosphere to come together and fight the 0.25% stock transaction tax. We must call our Congressmen and flood their email boxes to let them know how much of a horrible idea this is.

The pro-tax momentum is increasing as a result of this New York Times Op-Ed last week. If you read the comment section, you will see how many people are scarily supporting it without any regard for the unintended consequences.

Currently it is being considered by the Congress. It was actually in a draft of the original TARP bill and was taken out. Now with the Democrats fully in charge and the anti-Wall Street feelings at an all-time high, they don’t need the Republican votes to pass it. Note I voted for Obama, so please cool any partisan rhetoric.

If this passes, we all know what will happen. It will drive millions of active investors out of the market as it makes it uneconomic for them to trade. This will lower liquidity and make it more expensive to enter and exit positions for everyone. We all know what it is like to buy and sell an illiquid stock. Imagine that for the whole market. Disastrous.

The added price volatility from the illiquidity will hurt market confidence even more and further the exodus of other investors, which will in turn drive the market even lower. The net tax gain for the Government tax coffers may even be negative as investors stop trading and it lowers any short-term capital gains revenue.

However put all of the above aside. The aim of this legislation is to make Wall Street pay for their sins right? Let’s look at the impact to a typical middle-class American family that saves and invests for their retirement and their kids’ college tuition. 0.25% doesn’t seem like a lot right?

With each round-trip costing around 0.50% (2Xs 0.25%), just a few trades could deduct 1.5% from a family’s assets each year. The insidious nature of a percentage-based tax is that every 1.5% taken away is 1.5% of money that will never grow and compound in the future. Over 40 years assuming a modest rate of annual return, this tax will cause the middle-class family to have 45% less money for their retirement. You can adjust the numbers down or up even to no annual return or 1% deduction, but no matter what you plug-in this tax will penalize middle-class investors with a huge chunk of their savings over time.

The same goes for investors that own mutual funds, pensions funds, and even index funds. The vast majority of these funds have a decent amount of annual turnover. With this tax and even with a small annual hit of 1%, long-term returns will be severely negatively impacted.

Another unintended consequence would be driving capital away from buying and selling stocks to buying and selling options. Since this tax is a percentage of transaction tax, buying options would be more attractive as a way to get more bang for the buck with the least amount of tax. Massive buying of options would make the market tremendously more volatile as market-makers hedge their options exposure. Ridiculous volatility on top of volatility isn’t exactly what our markets need right now.

Politicians are in panic desperation mode right now where they are willing to try anything. Let’s stop them from pouring gasoline on the raging fire.

UPDATE: Here’s a link to contact your Congressman. Here are the links to the Senators.

UPDATE2: Larry Summers, head of the Obama economic team, wrote a paper in support of a stock transaction tax in the past. God help us. Here is a link to the synopsis of his paper.

UPDATE3: The large Wall Street firms and mutual funds will ask for exemptions to this tax and likely receive it due to their lobbying power and money. This will leave the brunt of the burden to us, the small investor.

UPDATE4: The original text of the 0.25% transaction tax bill that some Democrats tried to pass with the first TARP.

UPDATE5: Some people are rallying and signing a petition against the stock transaction tax bill. It was introduced on February 13th, 2009, you can read it here. The crazy thing was when the bank CEOs testified before Congress and were asked about the transaction tax, I fell out of my chair when all of them said they were fine with it. In hindsight, it’s ok with them because they don’t have to pay for it even though they are the ones that screwed up, their customers who did nothing wrong are going to be the ones paying for it. It was especially scary as Barney Frank got all excited with the CEOs’ positive response and said, “I think we’re onto something here!”.

Here’s some posts from the comment section of iBankCoin:

zubovsergei Says:
yea basically it is a 0.25% tax on the total amount of stock bought and sold, not on the profit. So if you scalp stocks, you will need to find another job. I would have to pay about $600,000 in taxes for 2008 if this tax was in effect. Unfortunately I only made $200,000.

HERE IS THE PROBLEM: wall street firms may lobby to get exemptions from this rule. Otherwise, hedge funds would be out of business as well. But you know that big money is always exempt from some rules (naked short selling for example)

Democrats have been trying to pass this bill for years and years. This tax actually was in effect until 1966 I believe, when it was repealed. But alot of countries already have a tax like this: UK, India. I think Japan had it but repealed it. China passed it in 2004, but also quickly repealed it. But like I said, with hatred of Wall street. it could very easily pass.

zubovsergei Says:
How is it that NONE of you on here care about the 0.25% TRANSACTION tax???? You guys do know that this thing WILL most likely be in the $850 billion stimulus bill and it WILL VERY LIKELY PASS??

Meaning that most traders will be out of business overnight. The transaction tax was a part of the original TARP bill, the first round bill that failed, and markets tanked 700 points. That bill didn’t pass, but not by many votes. Democrats don’t need ANY republican votes to pass this thing, unless republicans filibuster.

With some much hatred of wall street, this fucking thing has a big chance of passing this time around.