Tax on equity trades could destroy financial markets

After reading this recent piece on Bloomberg, I was utterly disgusted.  I just don’t understand how our policy makers can continue to pursue such terrible decisions.  Certainly the country is still in financial turmoil and there is a need to raise funds to support the budgets, but this tax on equity trades may very well be the stupidest idea yet.

Regardless of your philosophical beliefs, the reality is the world revolves around money.  If you don’t believe me, next time you are at the grocery store tell them you want to pay with ‘goodwill toward man’. 

Businesses require investment to operate.  In exchange for this investment, the business pays investors with dividends or capital appreciation.  What happens when every trade is taxed on both the buyer and seller side?  Just like any other activity, when you tax it, you get less of it.  Much of the liquidity in the financial markets are created by short term trades.  Financial institutions have traders working every day getting into and out of trades on a daily basis.

There are also many who day trade.  This can significantly increase their cost of doing business.  A tax of .25% may not seem like much, but if you are a day trader using $50,000 per day will see an additional cost of $625 per week in tax or $32,500 per year in ADDITIONAL  tax he was not already paying.  Day trading is a risky endeavor and this will likely force all but the wealthiest day traders out of the market severly decreasing the daily volume.

When daily volume decreases, the spread between the bid price and ask price will be wide enough to drive a dump truck through, which will have a negative impact on your returns.  It will also significantly increase the cost of doing business for mutual fund managers.  Do you think they will just ‘eat’ the additional cost?  Of course not, it will be passed on to you dear reader.

Let us not forget about your precious 401k’s, IRA’s, ROTH’s, and educational 529’s.  These are almost exclusively mutual fund holdings which will see major declines if this tax is implemented.  We also need to consider, what will happen to all of this capital that will flee the markets.

My guess is that it will flood into the  real estate market, thereby creating our next bubble in RE prices.  Once traders and investors around the world have their cost of doing business hit this hard, the money will not vanish, but like water it will follow the path of least resistance.  Right now, that is real estate.  Do we really want to blow up that bubble again?

Comments

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  15. What a fabulous topic to debate

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