It’s been all over the blogosphere the past week (well, at least much of the trading blogosphere)- H.R. 1068, or:Let Wall Street Pay for Wall Street’s Bailout Act of 2009. You can read the text of the bill HERE.
It was actually introduced on February 13th (Friday the 13th, for the superstitious). Introduced by Peter DeFazio (D-NY), it proposes a 25 basis point tax on many securities transactions including futures, futures options, stocks, and stock options. The ostensible rationale for the proposed tax is that “Wall Street got us into this mess, they were what necessitated the TARP (Troubled Asset Relief Program) , so let’s tax them to recoup some of the money they cost us.
My problems with this idea are numerous, starting with the fact that it’s a punitive tax on my livelihood for a problem I did nothing to create. Among others:
- How did those that bought stocks or futures cause the financial crisis? The meltdown was caused by CDOs (collateralized debt obligations) and CDSs (credit default swaps).If you really wanted to punish those that got us here, start with Congress, for encouraging lax lending standards.Or tax mortgages-that’s really ground zero of the crisis. (Not really, a tax on mortgages is a terrible idea as well. We want to make purchasing a house cheaper, not more expensive).Too little has been to help revive housing thus far.
- A transaction tax would lower trading volume an hurt liquidity. Countries with developed, efficient, liquid markets tend to have higher per capita GDP.
- A transaction tax would tend to drive trading volume to markets in other countries that have lower transaction costs. The most sophisticated investors tend to create a large percentage of the trading volume. They are also the traders most likely to have easy access to alternate markets. Not only would this hurt liquidity, but by driving trading volume offshore,tax revenues from the proposed tax would be reduced.
- As a result of trading moving overseas, the tax would transfer jobs overseas.
- A large percentage of stock holdings are held by institutions for investors 401k’s and other accounts. A tax would serve to lower the return on individual investor’s holdings, including already battered retirement accounts.
- The UK has a 25bp tax, the result of which is that large investors have developed a variety of swaps and synthetic trades to create synthetic holdings. The net effect is to create more structured product, “alphabet soup” financial engineering a counterparty credit risk. Do we need more of that?
I suggest that traders keep their ears open on this issue, and be ready to fight to prevent this misguided, ham-handed attempt to find a scapegoat.
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