A Tax on Trading is a Gift to Grifters
by Byrne Hobart
A recent New York Times editorial recently made the case for a trading tax. Superficially, it’s tempting: if we have a way to make counterproductive gamblers pay up for their vices, why not use it? There are several problems with the proposal:
- As Christine Hurt at Conglomerate points out, this tax could hurt the traders who do the worst anyway: “We like to say that the “buy-and-hold” people come out on top, so then isn’t the tax regressive — taxing the silly speculators who don’t understand investing, just like lotteries are regressive taxes on poor people who are bad at math?”
- It’s a tax on liquidity, and we really need liquidity right now. One of the great things about the stock market is that, unless you own millions of dollars worth of something that doesn’t trade very often, you can convert your stock into cash in a few clicks or a single phone call. That’s true because of the activity of what the article calls “speculators” (they’re actually market makers). A tax on that activity might mean that your retirement savings end up being suddenly worth 10% or 20% less when you try to sell, simply because there’s no longer an incentive for a trader to quickly buy from you.
- It’s going to be the best possible change for the worst possible investments. There’s already a transaction cost to buying a stock — when you buy Microsoft, you might pay about .25% of the purchase price in commissions and ‘slippage’ (the difference between the price a buyer pays and the price a seller gets). For a smaller, less established company, this could go way up — companies trading off the major exchanges can have total transaction costs of 10% or more, even for small orders. These companies tend to be of very dubious value — the kind you see advertised in spam touts and online message boards, rather than on CNBC. A flat transaction tax would double the transaction cost for Microsoft (.25% to .50%, even assuming liquidity stayed the same), but would have a negligible effect on that of the scam-stocks (10% to 10.25%). In other words, it would slightly increase the rewards for buying penny stocks over blue chips. Probably not what the plan’s backers are after.
The paradox of setting up a tax system is this: the things you want taxed are the harmful ones — smoking, drinking, reckless driving, feckless investing. But the easiest things to tax are the ones that get the most money in one place — income, stock sales, inheritance. Fortunately, this tax plan is easy to reject: it collects pennies at a time, for an activity that is, on average, quite beneficial. A financial transaction tax is a risky trade with no real reward.