Should traders be worried about H.R. 1068 transaction tax?

On Friday, February 13, U.S. Congressman Peter DeFazio, introduced H.R. 1068: “Let Wall Street Pay for Wall Street’s Bailout Act of 2009”, which aims to impose a 0.25% transaction tax on the “sale and purchase of financial instruments such as stock, options, and futures.” To be clear, this tax is not on the profits, it is on the entire dollar amount of the stock or futures contract. What now costs a few dollars to transact could cost several hundred dollars per round turn. This would end daytrading and most likely swing trading as we know it.

If this bill were to somehow pass, it is doubtful that any exchange in the USSA could survive. Market makers and scalpers could not possibly stay in business, liquidity would instantly dry up, and all transaction business would go elsewhere. The job destruction would be enormous, and massive amounts of money would evaporate as markets get crushed.

To put this into perspective, Peter DeFazio, a democrat from Oregon, has tried on several occasions to get a transaction tax imposed. In fact, since 1991 he has introduced 180 bills on various topics, with 161 not making it out of committee, and only 10 enacted. So the odds of Comrade DeFazio getting this bill through is not good. But with the blame for much of what is happening to the economy going to Wall Street, there is much anger by the general, non-trading public. Reality doesn’t seem to matter. It is perception, however wrong it is, that counts. We are seeing the president trying to pit one class against another, and punish responsible people and reward those not so responsible. If you missed the Rick Santelli rant on this subject please click here to see video.

Nobody in their right mind, with even a rudimentary education in economics, would ever consider such a bill. But we are now in the age of Obama, where congress and the president just signed the largest porkulus bill in the nations history, that nobody even had the time to read or debate. The president said there was not one single earmark. He was right. There were many, many more than one. Passing such a bill would have seemed impossible a year ago. But it happened. Anything can happen. It is a new era. This government is just winging it. Going from one bad idea to another. The trader tax bill, which seems too ridiculous to even consider, could easily get lumped into another bill and slip through, like so much that got through the porkulus bill. And consider Obama’s extreme left leaning education and his early influences and political ties. He probably doesn’t understand the importance of stock and commodity markets. They don’t seem relevant in the kind of utopian society he envisions. I think we’ve seen the best of Obama’s talent and abilities. He ran a brilliant campaign and reads great prepared speeches. There is little more, I’m afraid. The subject of this post is the bill by DeFazio, and not anything Obama is implicated in – yet. But I think it is important to put the timing of the re-introduction of this idea in the current political and economic environment. Obama is now president and the country is leaning drastically and unfortunately to the extreme left. Socialists don’t regard trading financial instruments as necessary to the common good. Traders are not needed. They don’t produce anything other than liquidity, which is a concept too abstract for those in power to understand. They will probably look at the total dollar amount of transactions currently and calculate how much 0.25% of that is. What they don’t understand is that 0.25% of no activity will be very little revenue, as the amount of future activity with the new tax will be next to nothing as exchanges move out of the country. When revenue dries up, they’ll probably raise taxes even higher. They won’t know what happened. They’ll most likely figure out a way to blame Bush.

Do I really think this bill has a chance of getting anywhere? Not really. One thing to consider is that Wall Street, for some mysterious reason, supported Obama. I’m sure there are many now with buyer’s remorse. But I think it would be difficult for Obama to turn on Wall Street, and also to destroy the option and commodity markets in Chicago. I also think Clinton, Bloomberg, and many in the financial centers would sit Obama down and try to explain some simple economic principles to him regarding the functioning of the markets, and the extreme repercussions should this bill see the light of day. Hopefully he is smart enough to veto it if it should get that far.

There is a petition going around you may have already seen. I’ll post the link here. You can open the link, type in a zip code, and it will send an email to the proper people in your district. It just takes a few seconds to fill out and send. Here is link: Tell Congress to Block the Trader Tax

14 thoughts on “Should traders be worried about H.R. 1068 transaction tax?

  1. Let’s see, the damage was done by unregulated OTC derivatives so let’s punish the people who trade on regulated exchanges!

  2. The reason Wall Street supported Obama is perfectly clear: the Republicans, and “movement conservatism” specifically, have been disastrous for America and the world. The days of Richard Nixon (for all his flaws, the last intelligent Republican to inhabit the White House, though Bush 1 came close. He screwed up by letting Saddam think Kuwait could be attacked in the first place, but I digress) are over.
    Anyway, don’t worry about H.R. 1068. Taxing transactions in this fashion would never pass and Defazio knows it. He is simply grandstanding for the folks back home. Gotta look busy!

  3. The danger is that it’s all about the perception of the majority. Only 1 in 100 people understands economics but 99 listen with their mouths wide open to the mass media blaming Wall Street for crisis and the the job losses. Unfortunately it is the 99% majority that the congressmen will be trying to please. Hopefully someone will stand up and explain to the honarable congressmen in laymen terms that this bill is suicidal to US especially at this point in time.

  4. Question re. the proposed Trader-Tax:

    Would an individual who daily trades open-ended mutual funds (such as Rydex, Profunds or Direxion funds, priced daily at 4pm) be subjected to this proposed tax? If so, what minimum holding period would be needed to avoid the proposed Trader-Tax?

    Thanks for making your blog available.

  5. Jim, I suspect the mutual fund would be charged and then pass the expense on to investors. But who knows, maybe they would get an exemption and the investor would be charged. I don’t think it has been clarified. I really doubt this will go anywhere.

  6. If trading dries up, there will be few transactions to tax and far less profits (capital gains) to tax; overall, tax revenues will fall. Plus, foreigners will be exempt from the tax, hence putting Americans at a disadvantage once more. On the positive side for Democrats, it will further weaken the economy and hence increase government’s control over the massess who see themselves increasingly dependent on government. Their argument for a “global economy” will be buttressed by manufactured destruction of our economy.

  7. Need not lose a winks sleep my fellow concerned. The sequence of trial and error will be quite creative this season with the new intentions at the helm, however the efforts will fail And once again the Free float system will mend its momentum and markets continue as we know it.

  8. I don’t like any tax hike. Guys get real 1/4 of 1 percent will dry up ALL transactions – you have got to be kidding. As for individuals many brokers charge far more for doing the trade. I might have a bit of slow down – but I truly doubt that. Mutual funds might be affected, day traders probably a bit but I still doubt it.

  9. Fury – you obviously don’t trade for a living
    This tax will hurt innocent investors and traders (who did not create this mess) and leave those really responsible for the mess off the hook.

  10. FINALLY YOU GUYS ARE GETTING THE RIGHT IDEA. We need to rethnk not only new sources of revenue ut the whole idea of taxation. My proposal is: throw out all of the tax code – 5% sales tax all tangables – 2% on intangables – i% all stock transactions. NO MORE IRS – NO MORE DEPRECIATION – NO MORE SS or MEDICARE TAX – It’s all tax anyway so call it all TAX – It would be easy to understand the states would collect it and we could sell gas at really low prices make the economy grow and gain the respect of every american. LETS DO IT !

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