A New Tax on Stocks and ETFs?
In an effort to curb a growing deficit, members of the House of representatives are lining up to create a new tax on stocks and exchange-traded funds. Politicians contest the new taxes will price out high frequency trading and remove speculative investments. Myself…I think this is all wrong at all the wrong times.
How it Works
The new stock market tax would cost investors .25% (25 basis points) on each purchase, effectively driving the price on every stock a quarter point higher. Lawmakers will exempt pensions, mutual funds, and other traditional retirement accounts as well as the first $100,000 in stock and exchange-traded fund purchases. After the $100,000 is surpassed, the tax will take effect.
Who Gets Hurt
Investment banks, day traders and wealthy long-term investors will be the first whacked by the new tax mostly because they’re the only ones who will run over the $100,000 allowance. Conservative estimates suggest the new tax would generate $100 billion in annual revenue for the US Treasury, giving it a strong foothold in Congress with 27 cosponsors already.
All investors will eventually pay for it, however, in the form of higher fees on mutual funds as the companies themselves will have to pass the costs on to their investors. Also, day traders would go virtually extinct, as it would severely eat into their margins. Finally, estimates show that the new legislation may remove 50% of the volume from the market, decreasing liquidity and ensuring more volatility is in order.
Why I Hate it
If the last paragraph wasn’t a good enough reason, consider this. There is absolutely no time when investment should ever be taxed in a free market economy. The simple fact of the matter is that now more than ever businesses need capital, and taxing investors to provide that capital only subsidizes spending. We cannot, nor should not tax investment at any time. Tax the profits, sure, but taxing the infusion of billions into the financial system is no way to build a recovery.
Update:
Well, we haven’t gotten a financial tax (at least as of January 4, 2011) but there were some changes on the reporting of investor cost basis. How about a $1,000 tax credit for retirement savings?
Nice article, anyone ever heard of Forex investing? It’s a good idea to check out, or so says my financial adviser
check it out
@MoneyGuru
Hey, I’ve heard that that is a good investment strategy. Just never met anyone who’s actually done it. It seems like a trustworthy investment, I will be considering this option heavily along with the others.
Good article, Jordan. I think some of the more populist-leaning members of Congress will crow about what a great revenue raiser this is, but privately, they know it would just be a killer on so many levels. The discussion right now seems to be more about tooting their political horn, and less about seriously wanting to enact any kind of legislation like this. Let’s hope it stays that way!