A bill being considered in the U.S. House Ways and Means Committee would impose an excise tax of 0.25 percent on the purchase and sale of all stocks, options, and futures. The tax would apply to the entire transaction amount, regardless of whether the trade results in a profit or a loss.
Democrats pushing the bill want to make Wall Street pay for the $750 billion bailout of the financial industry. By imposing the tax at the exchange level, the bill’s sponsor, U.S. Rep. Peter DeFazio, D-Ore., and 13 Democratic co-sponsors believe it will have “a negligible impact on the average investor.”
But tax analysts and industry experts say such a tax would punish all investors by doubling the cost of a completed transaction at a time when many Americans have seen the value of their investment portfolios fall by 40 to 60 percent.
The notion that the proposed tax would not affect ordinary investors ignores reality, say many experts. More than 50 percent of Americans participate in the market through 401(k)s, IRAs, pensions, education savings accounts, small business investments, or similar mechanisms.
Whether Americans manage their own investments or have a financial adviser do it for them, the cost of any transaction tax would pass through to the investors. These costs would be in addition to brokerage fees, other fees, and capital gains taxes.
According to Investors Business Daily, someone with a $500,000 account who executes 100 trades at $100,000 per trade would pay an extra $25,000 each year as a result of the tax.
Investors as ‘gamblers’
Rebecca Jarvis of CNBC and Stuart Varney of Fox Business recently discussed the tax with DeFazio, who defended it.
Both Jarvis and Varney expressed concern the tax would hurt individual investors, not Wall Street investment banks, because additional transaction costs means less profit.
Both asked about the likelihood of discouraging investment at a time when more investment is needed to increase liquidity in the markets.
“This tax would put a big crimp on the individual investor,” Varney said. “There are millions of people in America who make a trade when they get home from work, and you’re proposing to double that transaction cost.”
“I don’t think there’s millions,” responded DeFazio. Traders who “go on tiny little margins” will have to consider this in their calculations and try to get a bigger margin on their trades.
DeFazio suggested traders should hold their positions longer or put their money into the bank. “They’re not going to make much on two trades a day,” DeFazio said, questioning the market value of what he called “churning,” but what most economists would call liquidity.
Jarvis asked DeFazio about the effects the tax would have on small businesses that run on trading, saying “they might not be able to do business going forward with a tax like this.”
“You mean day traders?” DeFazio asked, “Tell me about the economic value they provide to our society, the stability they provide to our society?”
“For some traders, this is their job,” Jarvis said. “They don’t trade a lot, but they trade enough to make ends meet.”
“Gamblers,” DeFazio said. “They’ll have to get three-tenths of a percent on their bets instead of one-tenth.”
For months, Americans have been told that the primary reason for pumping billions of taxpayer dollars into the markets through bailouts has been the need for increased liquidity and stability.
Hurting capital formation
The Security Traders Association warns that the proposed tax would hurt capital formation and that it particularly targets “individual taxpayers, savers, small businesses, endowments, and those relying on retirement plans.”
The tax not only would decrease market liquidity, but would force more stock, options, and futures trades to overseas exchanges where costs are lower, the association warned. A larger tax burden, it wrote, means “less trading activity, less saving and investment, and most certainly less business in the United States.”
Expressing similar concerns, J.D. Foster, a tax analyst for The Heritage Foundation, said the tax “would continue the shift of the global financial system away from the United States — institutional investors would transact where the costs are lower. Once again, a Congress determined to protect the American people would drive thousands of American jobs overseas.”
But Foster doubts the legislation will pass, at least not in the near future.
Ryan Ellis, tax policy director with Americans for Tax Reform, agrees it would be hard to pass, but that Congress would even consider it reveals the mindset some members have toward investors. “Even if a company did the right thing, this tax would punish all companies and all investors, not just those that asked for a handout,” said Ellis.
Dallas Woodhouse, director of the North Carolina chapter of Americans for Prosperity, said the proposal is an “extension of the populist tone of punishing the bad people on Wall Street, but this tax would punish individual investors and companies. Why would anyone invest in job creation?”
All members of North Carolina’s Congressional House delegation were contacted, as was DeFazio’s office. The only respondents were spokespersons for U.S. Reps. Virginia Foxx, R-5th, Howard Coble, R-6th, and Patrick McHenry, R-10th, who all predicted the bill would never win majority support should it come up for a vote.
While some lawmakers doubt this particular proposal ever will pass, others in Congress appear determined to pass some form of investment tax.
Two House committees are considering H.R. 676, a bill to expand health care and Medicare for all Americans. This legislation, sponsored by U.S. Rep. John Conyers, D-Mich., seeks to institute “a modest and progressive excise tax on payroll and self-employment income” and “a small tax on stock and bond transactions.”
Karen McMahan is a contributor to Carolina Journal.