We pay a sales tax on most products we buy, so why isn’t there a tax when you buy stocks and bonds? In the United Kingdom, a tax on stock purchases raises four billion pounds annually. It’s hard to estimate how much revenue a tax on financial transactions would generate in the United States, but it’s an idea that could put a dent in the deficit.

The tax would most impact high frequency traders, who often speculate, and make the stock market more volatile. Taxes are used not only as a way to generate revenue but as a way to influence spending decisions, and a tax like this might decrease the public’s interest in trading. While the cost of a tax would be borne by the investment companies, the costs would be passed onto traders through higher spreads and less favorable pricing structures.

Productive and long-term investment would continue. Just like sales tax doesn’t stop consumers from purchasing what they need to survive in addition to desires affordable and not, long-term investors would hardly notice the tax. If this idea becomes law, the idea of taxing financial transactions will eventually become embedded in our expectations. That’s not to say that a law like this could be passed without a fight. Wall Street profits immensely from high frequency trading, and companies whose revenue would be subject to this tax and whose revenues could be affected by it have a loud voice and a lot of money in Washington.

Even if half of all frequent traders are discouraged away from their approach, a tax on Wall Street transactions could generate up to $175 billion in revenue. Congressman Peter DiFazio introduced the “Let Wall Street Pay for the Restoration of Main Street Act,” H.R. 4191, which would introduce a 0.25% sales tax on speculative trading and a 0.02% sales tax on derivatives. (Compare this with state sales taxes, ranging from 4% to 10%.) Retirement accounts, mutual funds, education savings accounts, health savings accounts, and the first $100,000 of any financial transaction would be exempt from this tax, in the current form of the bill. This helps to ensure the tax would be felt mainly by frequent traders, not most Americans investing for their future.

Do you support a tax on high frequency transactions?

New York Times

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Two years ago, Michael Brush from MSN said, like many other financial columnists, that the buy-and-hold investment strategy, or the long-term efficacy of that approach, is a lie. This echoed a lot of the prevailing popular thinking at the time. The stock market was at an all-time low. People who believed in buy-and-hold investing, which says one should avoid trading frequently in favor of holding investments for the long term, where particularly hit by the stock market downturn.

Experts pondered whether the stock market had fundamentally changed. The average annual returns of 8% would never be seen in domestic equities again. The MSN article provided the reason for this paradigm shift: there was more risk in stocks. I liked this response from a reader:

This guy, like many finance authors on MSN, not only has no clue what he’s talking about, but is saying the exact opposite of what is true. When the stock market goes down, the risk goes down with it. The cheaper the prices, the less the risk.

On the plus side, all the ignorant articles on MSN enable truly intelligent investors to make more money over the long-run.

Matt Krantz, financial columnist for USA Today, has good news for buy-and-hold investors:

Investors who have hung on haven’t done all that badly. It’s true that the stock market is still roughly 15% below where it was at its 2007 peak. But buy-and-hold investors have actually done better than that. For one thing, these investors have continued to collect their roughly 2% a year dividend yield. Adding that in, investors are only down 9% from the high.

Yet, many buy-and-hold investors are probably doing even better than that. One of the key tenets of buy-and-hold is continual investing. Rather than trying to time and market and dart in and out of stocks, prudent buy-and-hold investors added to their investments during the downturn. If you did that, buy-and-hold has paid off handsomely for you and has helped to get you to back even to the peak. In fact, many buy-and-hold investors might even be up from the 2007 peak if they bought during the downturn.

Michael Brush’s MSN article from 2009, which echoed popular opinion, should have been a good sign that enough investors had given up on the stock market. The sentiment, in a short two-year context, may have signaled the best time to double down and take advantage of low stock prices, with the exact buy-and-hold strategy that was being vilified.

There certainly is a possibility that the stock market will fall again, and perhaps find a new low water mark. Political unrest around the world is usually not a good sign for global short-term economic growth. Nevertheless, over time, those who continue to buy will most likely be rewarded. Buy-and-hold is back.

USA Today, MSN

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