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?
Published or updated August 22, 2011.