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Saturday, November 07, 2009 3:40 PM

Financial Transaction Taxes Would Cause Stock Market Crash

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Congress is discussing a horrible idea, putting a "transaction tax" on every stock or option purchase or sale. Please consider AFL-CIO, Dems push new Wall Street tax.

The nation’s largest labor union and some allied Democrats are pushing a new tax that would hit big investment firms such as Goldman Sachs reaping billions of dollars in profits while the rest of the economy sputters.

The AFL-CIO, one of the Democratic Party’s most powerful allies, would like to assess a small tax — about a tenth of a percent — on every stock transaction.

Small and medium-sized investors would hardly notice such a tax, but major trading firms, such as Goldman, which reported $3.44 billion in profits during the second quarter of 2009, may see this as a significant threat to their profits.

“It would have two benefits, raise a lot of revenue and discourage speculative financial activity,” said Thea Lee, policy director at the AFL-CIO.

“The big disadvantage of most taxes is that they discourage some really productive activity,” she said. “This would discourage numerous financial transactions. People flip their assets several times in an hour or a day. They make money but does it really add to the productive base of the United States?”

Lee said that taxing every stock transaction a tenth of a percent could raise between $50 billion and $100 billion per year, which could be used to pay for infrastructure projects and other spending priorities. She said the tax could be applied nationwide or internationally.

In Congress, Rep. Peter DeFazio (D-Ore.), chairman of the Highways and Transit Transportation Subcommittee, has seized on the idea as a way to help pay for a new massive surface transportation reauthorization bill, estimated to cost $450 billion over six years.

Instead of taxing all stock transactions, as the AFL-CIO has contemplated, DeFazio wants to focus on oil-based derivatives.

At the end of July, shortly before the House broke for the August recess, DeFazio introduced legislation that would impose a 0.2 percent transaction tax on crude oil futures contracts. The legislation would tax the options for oil futures (in other words, the premium paid to have the option to buy a futures contract) at 0.5 percent.
Potential Financial-Transaction Tax of 0.25% on proceeds and purchases

Earlier this year Money Blogs was discussing Potential Financial-Transaction Tax of 0.25% on proceeds and purchases
Monday 01/19/2009
Details of a new, proposed tax — a financial-transactions tax on the sale or transfer of financial assets — have come to light, and it’s not good news for traders. This new tax sounds small in percentage terms — it’s only 0.25 percent of proceeds and purchases as proposed — but it can add up to large sums for day traders and other hyperactive traders and force them to exit this business activity. Many active traders have sales proceeds of $10 million or more per year; some have well over $100 million. A 0.25-percent financial-transaction tax on $10 million of proceeds and $10 million in purchases equals a $50,000-tax per year, even if they breakeven or lose money.

This new financial-transaction tax was proposed to apply to stock, options, futures, and perhaps many other types of financial instruments too. Passage would spell disaster for the trading and brokerage industries, including collateral service providers. Our firm is dedicated to online traders and hedge funds, so we would also be impacted if this tax is passed. We need to take action to see that this doesn’t happen.

How did this tax proposal come to fruition?

A “financial-transaction tax” reappeared as a tax proposal during the first round of TARP legislation negotiated and passed in the fall of 2008. But that proposal failed. The proposal for this new tax was buried in the fine print of the TARP bill and it did not receive much public attention at the time; the much bigger TARP issues overshadowed it.

Thankfully, this proposal did not survive final negotiations in Congress, as has been the case many times in the past. Can we count on Congress to keep putting this fire out over the next several years, considering that that media may turn negative toward traders and Wall Street in general?
Britain and U.S. Clash at G-20 on Tax to Insure Against Crises

Unfortunately this ridiculous idea has surfaced again. Please consider Britain and U.S. Clash at G-20 on Tax to Insure Against Crises.
November 7, 2009
The United States and Britain voiced disagreement Saturday over a proposal that would impose a new tax on financial transactions to support future bank rescues.

Prime Minister Gordon Brown of Britain, leading a meeting here of finance ministers from the Group of 20 rich and developing countries, said such a tax on banks should be considered as a way to take the burden off taxpayers during periods of financial crisis. His comments pre-empted the International Monetary Fund, which is set to present a range of options next spring to ensure financial stability.

But the proposal was met with little enthusiasm by the United States Treasury secretary, Timothy F. Geithner, who told Sky News in an interview that he would not support a tax on everyday financial transactions. Later he seemed to soften his position, saying it would be up to the I.M.F. to present a range of possible measures.

“We want to make sure that we don’t put the taxpayer in a position of having to absorb the costs of a crisis in the future,” Mr. Geithner said after the Sky News interview. “I’m sure the I.M.F. will come up with some proposals.”

The Russian finance minister, Alexei Kudrin, also said he was skeptical of such a tax. Similar fees had been proposed by Germany and France but rejected by Mr. Brown’s government in the past as too difficult to manage. But Mr. Brown is now suggesting “an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transaction levy.”

Supporters of a tax had argued that it would reduce the volatility of markets; opponents said it would be too complex to enact across borders and could create huge imbalances. Mr. Brown said any such tax would have to be applied universally.
Tax Would Increase Volatility And Reduce Liquidity

I am aware of several large hedge funds that would move their operations overseas if this measure passed. If I am aware of some, I am sure there are hundreds more.

Think of the implications on traders thinking about stepping into a plunging market to buy. With this transaction tax who would want to step in? It sure won't be the LTBH clowns because they would already be in.

Right now shorts and short-term traders are the only ones who might step into plunging markets. The former to cover shorts, the latter to take a chance. Both provide much needed liquidity. The traders could count on a stop loss nearby where they can exit if wrong.

If this bill were to pass, there will be no one willing to step into plunging markets. Liquidity would immediately dry up.

Proposed as a way to soak the rich while decreasing volatility, this bill would soak all stock holders and increase volatility. The markets will crash if this bill passes. Of course Congress is doing so many other stupid things, the market is likely to crash anyway.

Mike "Mish" Shedlock
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