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Ore. Congressman Defazio eyes $150 Billion Transaction Tax

January 22, 2010

DeFazio Introduces Transaction Tax
By Oregon Small Business Association,

Oregon Representative Peter DeFazio and others in Congress are pushing a new concept that would fund spending programs by taxing securities and derivative transactions.  Supporters argue that H.R. 4191, Let Wall Street Pay for the Restoration of Main Street Act of 2009, which would implement a 0.25% transactions tax, will raise revenue without impacting the average investor.  The concept is that the tax is needed to ensure that Wall Street pays for their share of the needed investments.  Opposition states that the bill has many underlying problems and loopholes which would lead to an even worse economic decline.

Below are the pros and cons of the transaction tax

• Increase revenue to fund spending programs.  Tax would raise as much as $150 billion per year.
• The tax has a negligible impact on the average investor.
• The tax will ensure Wall Street pay for needed investment.
• The tax as a means to eliminate high-volume short-term speculative trading.
• The tax would likely put high frequency traders out of business.
• A transactions tax would reduce the inexperienced trading and would also reduce the trading of those whose trades are necessary to make prices reflect economic reality.

• There are enough loopholes that the tax will raise little money.
• The tax will drive down job and tax revenues overseas while inflating the balance sheets of banks.
• The tax will massively raise the costs of trading.
• The transaction tax is a tax on investors, not bankers.
• Main Street will see lower pension fund values, both in their own retirement savings and in the public employee pension plans they will now have to top off with new taxes on their homes and incomes.
• There aren’t enough exemptions and investors react by sharply reducing trading activity, so there is little revenue, but great harm to the market and the economy.

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Discuss this article

jack pearson January 22, 2010

Taxing stock trades isn’t a tax wall street idea, it’s a tax main street idea. Anytime you or me want to buy or sell a stock we’ll get SLAMMED with the tax. They say 0.25% is small. It would be if it was on profits. That’s the key, it’s not. It’s on the dollar value of shares bought.

Want to know how huge this “little” tax is?

To buy & sell 1000 shares of Walmart, you’d have to pay the government $272.50. That’s on TOP of capital gains tax if you profit. If you lose money, you don’t have to pay capital gains, because there werent’ any gains, but you’d still have to pay $272.50 for the fact that you invested in a stock. That’s outrageously huge.

Obama, Geithner, Pelosi, & Frank have already gave it thumbs down too. It’s that fringe defazio who brings it up every single year for the past quarter century to get some press. The guy is a joke. He spoke on the floor the other day blasting his own party’s President. LOL

rsikit January 22, 2010

Lets take a look at the pro’s of this, it says increase funds for spending programs, sure it will do that at the expense of 10s of 1000s of jobs in the financial industry who keep this economy going and who had no part in the crisis. Another pro , it says negligble impact on average investors “main street” well if raising the cost per trade buy almost 200 times is negligible well sure. Also if retires returns were severely damaged prolonging peoples retirement and harming the their current portfolios negligible then sure. Another pro, if we take out the high frequency trading and then we start paying for trades as they cost in the 1980s and really increase the spread of the investment product and cost of doing business then sure another pro. If we increase the cost of doing business as a pro with this tax then the small comapnies trying to gain some ground and expand will have no money to hire and grow thus forcing many businesses out of business and increasing the unemployment rate. So if it s Defazio’s intent on putting the US back 30 years in cost of business, causing the US to lose competitiveness in the only industry we lead in, and putting many 10s of thousands out of work, well then his hr 4191 will be a sucess! Please do not let populist anger cloud your common sense. As Mayor of NY said it yesterday, why don’t we hold back congress’s salaries for 10 years and only payout if the laws they enact actually help! That would be on par with what they are trying to do. I am a trader, I risk my own money. I had no part in the crisis. I make your lives better by risking my own money to provide liquidity to the stock market so you can get the cheapest cost and best prices on your investments in your 401ks and ira’s and other savings and investment products.

Josh January 22, 2010

This scheme was tried in Sweden not too long ago and was a miserable failure, it drove transactions to other countries and did not raise any money while significanlty hurting the financial industry there. This proposal will significantly decrease trading volumes thereby drastically reducing the estimated tax gain, increasing trading transaction costs (the costs you and I pay to place any trade). The terrible thing about this tax is that it is taxed on each side of the transaction (the buy and the sell) and is not just taxed on profitable trades but also loosing trades.

I agree that wall street needs to pay and the Obama administration has come up with a great way to make them do that that does not affect you and I through the idea of the bank Levy. The banks can not pass off this transaction costs to you and I like they most certainly can and will with a transaction tax.

Robert A. Green, CPA January 22, 2010

Good article and here are a few updates. Your statement “Congressmen DeFazio and others in Congress are pushing” obscures the fact that Congressmen DeFazio is the founding sponsor and by far the main pusher of this harmful tax which mostly hits Main Street, including many traders and investors in Oregon too.

The President and Secretary Geithner have been against this tax from day one – because it falls on the investor – as they had their own plans for a bank fee instead, which is targeted directly on banks and does not fall on Main Street investors. That bank fee plan was announced last week and further bank reforms – the Volcker Rule – were announced yesterday. Congressman DeFazio has been reprimanded by the President and his chief of staff for being a trouble-maker on this and related matters.

Congressman DeFazio’s bill H.R. 4191, Let Wall Street Pay for the Restoration of Main Street Act of 2009 is no longer valid in its current form and can not be voted on in the House. Its main premise is that Wall Street has not paid back 700-billion of TARP bailout funds, and that is no longer true after the announcement of President Obama’s new bank fee plan to pay back all remaining TARP losses. So the country has chosen a better approach that is more targeted and less destructive to Main Street investors and jobs.

There are small-business traders who live in Oregon who make a living for their families and pay taxes to their towns based on providing important market-maker functions to the markets. Their role narrows bid and ask spreads – which improves prices for all investors – and it provides important liquidity too, even during the meltdown. Farmers are in the same boat, they need to hedge their products in the markets and they screamed foul over a financial-transaction tax saying it would make hedging almost impossible to do.

Even if Congressmen DeFazio thinks this tax won’t hurt Oregon and he doesn’t care how it hurts the rest of the country that is unfair too. If a Congressman is ready to raise significant taxes on Main Street around America, then he should be willing to raise taxes on his own Main Street too. What other taxes does Congressmen DeFazio propose rising on the fine people of Oregon? Please don’t say Not in My BackYard.

Main Street January 22, 2010

I live in a small cow town in Central Florida. Far away from “Wall Street”. I trade stocks and futures to support a family of 4. This tax would put me out of business overnight. It would amount to a 100% tax after I net losing trades from profitable ones.

There are many ways to get back at “Wall Street” and generate tax revenue for government projects that would not hurt the little guy. On the surface this tax sounds good but when you dig deeper you will find that small investors will carry this tax burden not the big institutions, as it is being sold to the public by politicians.

ftf January 22, 2010

Middle class wealth destruction is underway. Bail out the debtors and lenders and make the savers and investors pay for it. The exchange traded stocks, commodities, derivatives, traders, exchanges and my retirement fund had nothing to do with the banking crisis. The banks traded amongst themselves and created the disastrous credit derivatives that did not even trade on the exchanges and were not open to public investors nor small-time traders. Short-term capital gains rates are nearly 50% if we make money. Now we would have to pay tax even if we lose money. Estimates from impartial studies such as from The Independent Budget Office of New York City estimate that this tax would result in net negative revenue after subtracting losses from lower capital gains and income tax loss from hundreds of thousands of jobs lost. A transaction tax would result in annual yield loss of more than 2% for long term investors according to the mutual fund industry, that’s if they don’t increase the tax. Important: At a 2% annual loss, investors starting out can expect to lose one half of their retirement because of reduced compounding. Any proposed long-term investment tax exemption means nothing. Fund managers will pass the tax cost onto us. As most trading activity will be stopped, it will severely reduce liquidity that makes it so cheap to purchase stock today. Important: This tax would increase the bid-ask spread and broker fee costs multiples more than the tax itself, yes, multiples more than the tax itself. Around 1990 both Sweden and Germany got rid of their transaction tax after only a few years. Other countries have recently abolished their transaction tax. India is in the process of removing the tax in a few months. The antiquated transaction tax is a relic of the past. It does not work. It harms the people.

David January 22, 2010

DeFazio’s logic is completely convoluted with this proposal.

The tax he proposes will crush trading volumes, thereby removing the source of the very thing he wants to tax.

So the result will be a major disruption in financial markets, a loss of capital gains tax revenue to the government from trading/investing profits, and a loss of jobs throughout the country that support the financial industry.

It just makes absolutely no sense, and is another misplaced knee-jerk reaction to the causes of our recession.

Marty January 22, 2010

As an example of what can go wrong with a tax like this, a few years ago Sweden imposed a transactions tax.

It was a complete failure.

What happened is that trading volumes naturally fell, and as they did the tax revenues from capital gains fell. And taxes that were paid by employees in the business also fell. So it led to a major mess in Sweden’s markets and led to no overall gains.

Anyone interested might want to read more about it on Wikipedia:

James January 22, 2010

The comments above perfectly outline why this last century tax idea would be a dangerous attack on the US economy and its middle-working class.

Secretary Geithner’s clear rejection of such a tax, along with well-informed Treasury and inter-national economists, can be attributed to high level financial modelling that reveals not only would such a tax be revenue-negative, but the multiplied downward spiral effects from business closures would end millions of jobs, forcing main street workers onto the unemployment line.

It seems also that further tinkering with a measure like the one proposed by Mr deFazio would drive the best and most productive institutions off shore. America would lose business billions to financial centres like China’s Hong Kong, Singapore, Switzerland. Remember, China is ready, willing and waiting to avail itself of whatever business opportunities happen along.

American proponents of this idea (an idea described by respected tax professionals as “reckless”, “crazy” and “wildly irrational”) don’t appear to have done their homework.

US banks and services must be permitted to rebuild, whether they are loved or not, for the future benefit of the working nation. They must be encouraged to re-employ and participate in growing the economy. It’s time to get over it, for the greater good.

We have a mental picture of New York City morphing into the Big Detroit. Would that be a just outcome for American moms and dads? This would be an unproductive, job-ending, revenue ending tax. Revenge might feel good, but it is a destructive emotion, especially when fiscally dangerous proposals enter the mix.

The tax is ill-directed. US Treasury officials clearly acknowledge that the problems were certainly not caused by the sector that such a tax proposal targets, and that its existence would resolve absolutely nothing.

Beyond all this, would American people ultimately thank a leadership that would be so foolish as to enable a fiscally crippling measure such as this?

Friends of America would prefer a revitalised, responsible and non-vengeful approach to banking stability. You don’t throw the baby out with the bathwater. Countries that did not enter a recession, did not engage in irresponsible lending to irresponsible borrowers, and consequently did not experience bank failures, will not engage in measures like this.

The tax proposed by a very small few would damage millions of innocents.

Dan McCarthy January 22, 2010

If this plan were instituted, trading volumes in the United States would fall over 90%, thus liquidity would dry-up and basic financing would greatly suffer.

Liquidity in the markets is delivered through speculation. The vast majority of volume within the markets is currently set into motion by high frequency and shorter term traders. These traders are looking to trade an instrument from let’s say 10 times a day to 10 thousand times a day. Investors who trade even as frequently as once a day is hoping that they can squeak profits of .25% out of their transactions. Doing one trade per day returning .25% would deliver well over 1% return per week. Once you take compounding interest into consideration returns of this sort would be astronomical.

Most people believe that the sole purpose of the financial markets is to enable companies to find investments and for people to gamble. The truth is that today the most valuable contribution of the financial markets is probably the ability to offset risk and allow farmers, insurance companies, small business owners, airlines, etc. to mitigate the risk of their conducting business.

People joke about weather derivatives, but they allow farmers to ensure that they can hedge their expected returns against destructive weather patterns, commodity futures allow companies to hedge themselves against severe price changes for their required commodities.

Speculators deliver an efficient, inexpensive market to the businesses and individuals who need this assistance. If speculators weren’t trading these instruments, the markets wouldn’t be truly available to entities when they needed them.

Overall this proposed tax would sap the large majority of liquidity out of the financial markets and would have very severe consequences that would trickle-down into all walks of life…

Common Sense January 28, 2010

Whoa! There are a lot of wild statements without any support in these comments. Claims that this tiny tax will wipeout 90% of the market is just plain wrong. Here is a very thorough analysis done by the Center for Economic Research

I would also suggest that everyone run there own numbers. For example, if I purchase $1,000 in stock I would pay $2.50 in a transaction tax. If I purchase $10,000 I would pay $25.00. If that investment increases 10%, I would make a $1,000 profit, and I would pay $27.50 when I sell. My brokerage fees are a lot more than that.

If I can live with it, why can’t Goldman Sachs? They’re smart traders. I’m sure they will simply adjust their behavior towards the most profitable trades. And I’m sure they won’t close up shop.

Transaction taxes like this were in place – and still are to fund the SEC – until Wall st started lobbying against them in the 80s.

JTaxpayer January 29, 2010

Hey Jack Pearson – Your Walmart example sounds scary until you realize that buying 1000 shares of Walmart stock will cost you over $50,000. That’s a pretty big transaction. Seriously, how many ordinary traders make such large transactions in a year…or ever for that matter. You are trying to scare and mislead the public. I think a $250 tax on a $50,000 purchase doesn’t seem crazy. Why don’t folks stop trying to mislead people and start telling the truth. Nobody wants to pay taxes, but we are fighting two wars people. Let’s not leave the debt to our children and grandchildren.

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