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Taxing Wall Street Transactions

This article was written by in Investing. 12 comments.


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

Published or updated August 22, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar krantcents

It makes me wonder what the effect would be. Would it reduce speculation or just add to the cost?

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avatar wylerassociate ♦162 (Cent)

I’m ok with a Wall Street tax but I can also say that this has very little chance of passing with a presidential election nearly a year away not to mention that wall street runs the US Senate.

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avatar Investor Junkie

High frequency traders adds much needed liquidity to the market. Keep this in mind approx 80% of daily volume is from this type of trading. A tax would IMHO hurt, not help this much needed aspect of any market.

In regards to high frequency trades I’m not for them sending out false bids/offers to manipulate the market, and should be regulated better in that respect.

Outside of that I don’t care if someone holds a stock for a few min. How they trade is their decision.

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avatar Money Beagle

I think HFT is out of control and is damaging to retail investors, ie anybody in middle America that has a 401(k) that touches the stock market. HFT adds liquidity but at what cost? Someone has to lose the money that the computers make.

I’d say a 0.05% on HFT long position transactions and 0.5% on HFT short position transactions is more than fair.

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avatar Investor Junkie

Again in my case I’m for it as long as it’s not market manipulation.

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avatar Jake

I’m for unless someone can show me some concrete, numbers-driven proof that this would do an iota of harm. But I agree it’s stillborn until 2013.

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avatar Ron

I would want proof that the money raised would actually go to deficit reduction. We’ve been promised that pack of lies for decades. The fact is, politicians would just waste it, as usual, and I don’t think we have a revenue problem in Congress. We have a spending problem. We don’t cure alcoholism by giving the offenders more alcohol, neither would we cure our spending-out-of-control Congress by giving them more money.

Let Congress prove they can spend less, THEN let’s talk about tax increases. Until then, we’re just spitting into the wind.

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avatar qixx ♦1,895 (Half-Dollar)

I’m of similar thought. Congress just needs to spend smarter. I’d support a Balanced Budget amendment or law. I’d support a law going further and requiring the deficit amount be required to decrease each year (even if $1 was acceptable). If Congress can manage that then they would not need these additional tax revenues.

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avatar Ceecee ♦53 (Newbie)

I hadn’t heard of this kind of a tax before. I would like to see much less volatility on the market, but I’m not sure this would do it. Does it work in England? I might rather see a national sales/luxury tax on ultra high end items.

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avatar Cejay ♦1,521 (Half-Dollar)

To be honest I would need further information. But an off the cuff answer would be yes but only if it is for the high frequency users.

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avatar Harm

Isn’t there already a tax on transactions? (A very small one, the S.E.C. tax? or am I
behind the times, for all I know it’s been eliminated)

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avatar Frank

I support the taxing of Wall Street and think the time for the Tobin tax is long overdue. http://en.wikipedia.org/wiki/Tobin_tax

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