STA Opposes Transaction Tax Proposal

Written by: John Giesea

2 December 2009

The letter below is posted on our STA Trader Advocate site and we have activated our grass roots effort to share our opinions with our individual elected representatives.

I understand that Congressman Peter DeFazio (D-OR) and four original cosponsors are introducing a bill titled “Let Wall Street Pay for the Restoration of Main Street Act of 2009.” According to a November 18, “Dear Colleague” letter circulated by the bill’s sponsors, the legislation would establish a “securities transaction tax [that] is applied to stock transactions (1/4 of 1 percent (0.25%)), futures (0.02%), swaps (0.02%), credit default swaps (0.02%), and options (at the rate of the underlying asset).”

I strongly oppose this legislation. Its enactment would lead to serious disruptions in the capital markets while burdening Main Street with paying the tax.

The authors of the legislation state that is intended to “make it clear to our constituents that we know Main Street is suffering and a restored Wall Street should now share in its recovery with everyone else.” In spite of exemptions for tax-deferred accounts and other specified trading, the incidence of the tax would ultimately impose a significant and open-ended burden on the individuals and businesses that make up Main Street. For example, while an individual trader may not accumulate $100,000 in trades annually, an individual investor in a mutual fund will pay this tax as the fund itself will vastly exceed that amount in trading in a year.

What the creators of this bill need to realize is that Wall Street and Main Street are not separate entities. Wall Street helps to build Main Street by raising the capital businesses need to operate and employ Main Street. The vast majority of Main Street investors use managed accounts and mutual funds to invest their savings, the fees paid for such services help sustain Wall Street. This tax would be passed through to those investors, the very people that the creators of this bill claim they are trying to protect.

The rate the bill would impose on equities transactions, 0.25% is meaningful in the context of stock trading, and could drive trades offshore to foreign venues. For example, the tax on a $10,000 trade would increase the cost of a round trip transaction by $50. This additional tax burden would result in less U.S. trading activity, less saving and investment by our citizens, and less domestic business. As the United States struggles to recover from economic recession this transactions tax could jeopardize our position as a leading global financial center.

The proposed $150 billion transaction tax would be counterproductive to the stimulus legislation. Tax increases to “pay for” the cost of stimulus will likely blunt or negate the economic stimulus that would otherwise be provided by such legislation.

Increasing the execution costs of an individual trade would greatly increase the cost of doing business for the essential liquidity providers on U.S. stock, options and futures trading venues. These market makers, whose constant participation is the major source of market liquidity, operate on razor thin margins. This tax would expose them to the choice of continuing to provide liquidity at a profit level that would not sufficiently compensate them for the risks assumed, taking their business overseas, or simply closing their doors. A reduction in the number of liquidity providers would decrease efficiency of the markets, result in wider bid ask spreads, and increase volatility.

When you assess the far reaching implications of this tax, you find that you cannot tax Wall Street without harming those on Main Street. This transaction tax would cause harm to large and small businesses alike, regardless of address.

I respectfully, but strongly, urge you to oppose this bill which will cause irreparable harm to investors, U.S. capital markets and the economy.

  1. Taxes are never good for an industry

    — gerald worthen · Dec 2, 08:36 AM · #

  2. Dear Representative Person,
    I believe that this proposed legislation is wrong headed in so many ways that I will not even begin to innumerate. Let me say this, if we are going to go after the villans in this issue let us start with each and every legislator that took contributions from the firms at the head of the line and we should start with the current President of The United States and work our way down through Sen. Dodd and Rep. Frank and ALL the others. When you have done that then we talk about this tax. Sincerely, George Alexander

    — George Alexander · Dec 2, 11:52 AM · #

  3. stop the madness, encourage growth which creates reciepts, rather the destroy markets and growth in the economy

    — T Andros · Dec 2, 02:12 PM · #

  4. I am opposed to this tax proposal

    — Roger Dean Glasgow · Dec 3, 07:33 AM · #

  5. Tax something and you get less of it. Cut taxes and you will get more og it. Which makes more sense? I strongly oppose this tax. Why tax people and industry more in the face of a deep recession? It makes no economic sense. Do not do it.

    — Brian Jamison · Dec 3, 01:42 PM · #

  6. STA, you are way off base here. As a trader for a medium size INVESTMENT manager, I strongly am in favor any idea that will put a stop to the high frequency trading that exploits my presence in the markets on a daily basis. My orders represent investments in companies made on behalf of my thousands of small individual investors that are in my funds. The excuses for keeping this type of exploitive day trading alive is the same self serving reasoning that the SOES bandits used a decade ago. STA, please change your stance on opposing this tax.

    — Anonymous Fund Trader · Dec 4, 01:14 PM · #

  7. This new proposal will cripple what I do for a living.

    — Brian Frechman · Dec 6, 06:54 PM · #

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