Transaction Tax Gaining Steam

Imagine if every time you bought stocks or bonds you were hit with a small tax.

How small? 0.0003 cents for every dollar. So if you made a $10,000 transaction, you would be charged $3.

Under this circumstance, I doubt you would even notice the fee. But the big banks on the other hand, who regularly do transactions worth hundreds of millions, would definitely feel it.

Well, get ready for it. Because of two Senators have their way, a transaction tax will come to the states and could raise $350 billion over the next decade.

From the New York Times

On Nov. 16, the French Senate passed a bill supporting a financial transactions tax. And the European Commission in Brussels has said it would like to put a tax of $10 per $10,000 of transactions in place throughout the European Union by 2014, predicting it would raise 57 billion euros ($77 billion) a year in European countries alone.

Last month, Representative Peter DeFazio, an Oregon Democrat, and Senator Tom Harkin, an Iowa Democrat, proposed an American version of the tax that they said could raise $350 billion over 10 years.

Their legislation would impose $3 in taxes for each $10,000 in transactions. Other proposals, including those from the nurses’ union, call for a tax of $50 per $10,000.

Mr. DeFazio said his tax plan would “raise money to invest in the real economy,” but he acknowledged that it faced an uphill battle in Washington, especially within the antitax Republican caucus.

Opponents say that even at the rate in the DeFazio-Harkin bill, the tax would add significantly to the cost of trading, exceeding what institutional investors pay in commissions.

“At a time when we face a slow economic recovery, such a tax will impede the efficiency of markets and impair depth and liquidity as well as raise costs to the issuers, pensions and investors who help drive economic growth,” Kenneth E. Bentsen Jr., executive vice president for public policy at the Securities Industry and Financial Markets Association, said in a statement.

George Osborne, the British chancellor of the exchequer, described the proposed tax as “economic suicide” for Europe. In this time of economic crisis, he said, the European Union “should be coming forward with new ideas to promote growth, not undermine it.”

And Glenn Hubbard, who was chairman of the Council of Economic Advisers under President George W. Bush, said the Robin Hood tax is a “monstrously bad idea.”

“Such a tax isn’t really going to get at the banks,” added Mr. Hubbard, who is now an adviser to the Republican presidential candidate Mitt Romney. “It’s going to hit the people who own the assets that are traded,” like investors.

Supporters of a financial transactions tax note that Britain already imposes a levy of $50 per $10,000 of stocks traded, while Hong Kong and Singapore, with fast-growing financial markets, impose fees of $10 to $20 per $10,000 of the value of certain transactions. The United States imposed a tiny tax on stock trades from 1914 to 1966.

The British actor Bill Nighy, who has made online videos promoting the tax, calls it a beautiful idea. “It would raise enough money to solve problems at home and overseas, and it could do it without hurting ordinary people,” he said.

To be sure, a tax like this would definitely take money away from the banks – $35 billion a year to be exact. How the banks, who are already strapped for cash, could afford to pay this and stay solvent is still a mystery.

But a “small” detail like that hasn’t been enough to keep some famous people from supporting it. Among the people who think it’s a good idea is Warren Buffett, Bill Gates, George Soros, and Pope Benedict XVI.

One problem with this tax is that, in order for it to work it would have to be applied globally. Otherwise, a U.S. bank could get based overseas to try and avoid the tax. So it would have to be structured in a way that any bank doing business in the states would have to pay that tax for domestic transactions.

Still, there would be some serious problems at first. For example, there are banks that engage in high-speed trading. These firms typically buy and sell a given stock multiple times in a minute. And a nice side effect of this trading is that it adds more liquidity to the market (since buy and sell orders can be triggered rapidly.)

But with a transaction tax, this kind of trading becomes far more expensive. And it could easily reach a point where it is no longer profitable. And that means we could see a dip in stock prices when it first gets implemented, as liquidity vanishes into thin air.

I can just hope that Congress doesn’t rush to pass this tax. And that they think through all the possible repercussions before it goes live.

Then again, expecting Congress to think about anything is an exercise in wishful thinking.

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