1/4% Stock trading transaction tax....how do you feel about it?

With the exception of the financials, how - exactly - does taxing the stock market have negative consequences on general commerce and the greater economy <i>at all</i>? If CAT is trading at $20 instead of $25, is there a coresponding drop in the production of goods?

Wall Street thinks <i>way</i> too highly of their relevance to the greater American economy.

 

Well, since Wall Street has become the modern equivalent of the great Greek forums, we can't help but listen. Watch as Obama's actions cause steep stock failure!

 

How would this affect extreme traders like daytraders? Would the markets be more stable? What's the estimated amount of revenue it can raise?

 

That would seem to be the huge check mark in the "positive" column of such a measure. For me, it's more that than the actual income it generates.

Millions of idiots can make hyperbolic and emotional trades all day long with little to no transaction cost. Think that exaggerates both bear and bull?

EDIT: Perhaps a horrible analogy, but imagine a post tax in GARM. Think the quality and rationality would improve? Maybe, maybe no. Maybe it would just be full of the wealthy idiots posting.

 

In the short-term, nothing. In the long-term, it would be more difficult to raise capital if stocks were lower. For example, if CAT wanted to raise $20 million in new equity, they'd have to issue more shares if it was trading at $20 vs. $25, making debt a more attractive option than otherwise.

As for this particular tax, I'm not exactly sure what is being taxed exactly - let's say you buy $100,000 of IBM stock. Do you pay a 0.25% on the $100,000? (and is it the buyer or the seller?) If so, that would be absurd - it would really create a much less liquid market. Suddenly, commissions go from $8 or whatever to $250 for that transaction.

On the flipside, having much less buying and selling means that stock prices would tend to be more stable. You wouldn't have people getting in and out constantly and you'd limit daytrading pretty severely. The primary players would go back to being institutions and other longer-term investors since many of your profits will get eaten up with taxes for daytraders.

All that said, I don't think it would necessarily lower prices over the long-term because those prices are going to be based on the potential future profits of the companies (initially it might, as short-term traders get out of the market). But you'd also reduce liquidity in the market. Overall, it seems like a bad idea to me, but I'm unclear how exactly the tax would work and what exactly it would tax at this point.

 

The stock market is based on future cash flows/earnings of a company. So in essence, a higher tax results in lower profits which in turn drives down the stock price.

In the most simplest of terms, the price of a stock I am willing to pay for today is going to be lower because of the profit implications, such a cap and trade and a raise in capital gains. Whether you agree or disagree with the policy, it has a negative effect on the market. I don't think anyone can argue against that.

 

Anything to get the day traders out of the market and investors going back to fundamentals.

 

You seem to be mixing up cause and effect. The markets react to the economy. The economy doesn’t react to the markets, except in extreme and limited cases. Taxes on sales of securities have absolutely no effect on the profit sheets of the company being bought and sold. The tail doesn't wag the dog, etc. I will say you are certainly not the only one to suffer from this malady of confusion.

I care minimally what it would do to the market. It will have negligible effect on the greater economy. Having spent some time buying and selling off the Pink Sheets, I think the liquidity issue mentioned is way overblown unless you are an institutional investor.

In any case it certainly wouldn't be the impetus for a new great depression analogous to the negative effect of Smoot-Hawley. Too many people treat the markets like Las Vegas, and projecting for the presence of a greater fool seems to be the primary investment screening criteria.

 

did day traders make AIG lose $100B last year? because that's what this bill seems to think. why are we punishing "wall street" by punishing investors in companies that trade on wall street. day traders, value traders, whatever traders make trades and if they go wrong, they lose money. they don't get TARP funds. that's the way it works. and whether you buy for 15 minutes or 15 years, what is the difference? you buy at a price someone is willing to sell at or sell at a price someone is willing to buy at. all any additional traders do is provide liquidity, and i don't see how liquidity can be considered a bad thing. wouldn't illiquidity necessarily increase localized disequilibriums?

there weren't all that many people in the markets in the 1930's, and certainly not millions with computers making $8 trades, but we still managed to have enormous volatility. why? because there was an enormous crisis and it seemed like the world was ending. kind of like now. and vice versa with the irrational exuberance of the tech boom. look at the bull market from 2003-2007. that S&P graph is one damn smooth line up, day traders and all. probably because everything was calm and times seemed good.

but by all means, lets not punish the companies that insured billions and billions of dollars worth of crap with no intention of ever paying the claims and then took our tax money, lets not punish the runners of ponzi schemes, lets not punish the companies that levered up on bets with no cushion for being wrong and then took our tax money, no no. lets punish "wall street." and by wall street, i mean the people on main street who invest through wall street. that'll solve our problem. if we can just ratchet up the populism of our rhetoric and actions just a little bit more, it'll be sunshine, lollipops, and rainbows as far as the eye can see.


P.S. i don't really see how this could have a Smoot-Hawley effect because, without being an expert on Smoot-Hawley, i assume that materially impacted profits whereas this would just seem to materially impact the price-finding mechanism of the market, not necessarily the price itself. but i don't pretend to be an expert on how taxing investment harshly could have huge effects on stock prices aside from the short term exodus.

P.P.S. if people think the market doesn't affect the economy, then why so worried about day traders making stock prices move a lot each day? if it's not lowering profits or costing jobs, then why not just stay out of it?

 

but is there a correct way to "treat" the market? isn't the market just where people buy and sell things at agreed upon prices? whether i'm "gambling" and you're being especially "prudent" or we're both "prudent" or both "gambling," so what? you agreed you wanted to get rid of this stock at 100 and i agreed that i wished to purchase it for 100. the market's job is done. if i sell it 15 minutes later at 102 because i no longer believe it will go up and someone else is able to purchase it because they think it will and they want to hold it for 10 years, why does it matter?

but there is always going to be a greater fool. somebody has to be the person who sold at the low and/or bought at the high.

 

This legislation is pure idiocy. Daytraders provide much needed liquidity in the markets. Otherwise, trading would grind to a halt. At my firm, I trade precious metal futures on a very short time frame basis. This would change everything and probably put me out of work since I can't employ certain strategies anymore. At the end of the day, I don't think this has a chance of passing though. If it does pass, get ready for true financial armageddon.

 

How about we add a tax for investments the bet against growth? For shorting?

 

I will just trade in China market. So I voted yes.

 

Good point made by francis 4 pres.

AIG would be bailed out traders that had nothing to do with debacle. AIG would pay $0. I voted no. Traders would be unfairly penalized for a mess that has little to do with them.

There should be some kind of derivative tax instead and additional regulation. The tax could go to a derivative bailout fund.

 

I think it is a decent idea......it has gotten too easy to trade, and gone away from a longer term investment strategy to more of a get rich quick one....

Maybe it makes people think a little more about which stocks they are buying.

DD

 

For the most part stock trading is an activity that should be discouraged from being done too frequently. It leads to the whole outlook of American industry being on the next quarter or the next news story. It has led to excessive risk by CEO's and others.

I think it would be certainly worthy of consideration as a way to raise money for the bailout of Wall Street and the banks. Alternately maybe there should be a tax of say $25 per trade or $100 per trade on trades over $10,000 etc. They made the mess, they should pay for it. Think of it as sort of a sin tax. I am open to arguments that it would be a bad idea.

 

Do they actually expect us to believe that a tax would be phased out? Yeah, right.
Wasn't the federal income tax instatement in 1913 supposed to only pay for the war debt?

 

Tell ya what, don't phase it out until our debt is paid off....this country needs to get fiscally responsible.

DD

 

Ultimately the way we as society treat the market is a result of the way the markets interact with society.

The point of having the markets at all is to have a well regulated and orderly environment for people to buy and sell ownership in companies. (BTW, if anybody wants an interesting mystery novel centered around 17th century stock or commodity markets, I recommend The Coffee Trader or A Conspiracy of Paper, both by Davis Liss). When it becomes consistently disorderly and a persistent disruption to greater society then regulation needs to be tweaked until it returns to an orderly state.

It is interesting to me that the two people most vocally and vehemently opposed in this thread are professional traders. Vested interests always oppose fixes for greater efficiency or transparency that threaten their interests. I don't really care for this proposal; I don't care for taxing losses. At the same time, I do think another method of discouraging disruptive behavior on the markets is appropriate, and I do think it is an appropriate source for government revenue. I certainly concede that some pros will absolutely be hurt by the tax proposal. I absolutely sympathize with their positions. But one should keep in mind that what is good for them isn't necessarily good for the markets. For a similar example, see the music companies and their obsessive, bombastic, and outlandish rhetoric about the society-destroying effect of the internet on America.

There is always going to be a greater fool who is willing to play three card monte with a huckster on a street corner. That doesn't mean that confidence tricks should be legal, and it doesn't mean that confidence tricks are somehow pure or right.

If the markets are only a confidence game for the professionals to lure in unsophisticated naifs and their grandmothers in order to take their money and redistribute it to the pros, it functionally detracts from the wellbeing of society - a vice, and should be treated by the government as such.

I’ve been reading several books about the markets in the 1930’s – 1960’s. It is amazing how much more orderly it was then, and how well it functioned without day traders sitting in front of their computers looking for the next head and shoulders pattern to emerge. The markets didn't dry up and die then from lack of liquidity, either.

As far as I can tell, the markets haven't operated in a orderly fashion since the widespread advent of greater access from home computers. Granted, its only been two cycles, but in the 100 years before that, I don't think there were two other such cycles end on end. Volitility of any kind is great for the pros. I think it is obvious, however, what such manic-depressive wild swings do to greater society.