Question and opinion about Financial Transactions Tax or Tobin Tax

T

TimeCorrosion

http://www.nytimes.com/2009/01/13/opinion/13herbert.html?_r=3

http://www.elitetrader.com/vb/showthread.php?threadid=150546

The way I understand this tax is that a o.25% tax will be levied on the value of a transaction; e.g., on $10000 if the stock or option is valued at $10 and the transaction amount is 1000 shares or 10 option contracts.

This is unsustainable and the tax bill will be self-destructive if you do the math.

A 0.25% tax on the principal to open a position would mean 0.5% round turn, and 1% for 2 round turn trades. Most professional traders would do more than 2 trades per day and they would lose 1% of their capital (or the principal involved) per day regardless whether they make profit or not; and they will lose 100% of their capital in 100 days !!! Unless they make more than100% every 100 trading days, they will die !!! If they have to make 100% every 100 trading days (or 250% every year) just to break even, why the fcuk even to work? Might as well watch TV all day and get government unemployment benefits !!! If they make 250% every year, in a few decades, they will be the richest men on earth, but this has not happened. Can CitiBank or Goldman Sachs make 250% every year? I doubt it. But to survive this tax, they HAVE TO make 250% EVERY YEAR!!!

Or am I missing something?
 
Quote from TimeCorrosion:
A 0.25% tax on the principal to open a position would mean 0.5% round turn. . .
Or am I missing something?
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The way the bill is written, the tax is "per transaction" and is levied on the venue (i.e. the exchange). A transaction from the exchange's view is a matched purchase + sale pair, so it is likely the tax would be 0.25% per round turn. But the wording is vague enough that the government and courts could interpret it the way the OP did (i.e. 0.25% to buy and 0.25% to sell).

Regardless of whether it is 0.25% or 0.50%, the tax would make active trading (i.e. day or swing trading) no longer feasible. There are no exemptions for specialists or market makers, so liquidity would disappear.

To the OP: Yes, this is as bad as it looks. The good news is that it is just another draft of a bill that has been introduced every year since 2001 (as I recall); any congressman can propose just about anything whether it makes sense or not; and the best funded lobby in Washington (financial) would be decimated by this. The bad news is that people are very pissed off, and bad legislation sometimes gets slipped through.

Personally, I think the chances of this nonsense passing in the foreseeable future are nil. It would be almost impossible to implement the way it is currently written.
 
I swiped a post from the link and added a few more:


There are several parties who deserve the BIG FINGER OF BLAME here.

1. First and foremost, the DemoCraps!! Their 1999 legislation demanding Affirmative Action Lending and that Fannie Mae guarantee the loans.

2. RepubliCraps for Graham-Leach-Bliley deregulation.

3. Failure of the regulatory framework to keep pace with financial innovation (the shadow banking system, derivatives and off-balance sheet financing).

4. The Fed for providing stupidly excessive liquidity at stupidly low rates. Greenspan for fighting to keep the derivatives
market unregulated (see Wendy Graham and the Enron Loophole as well). Greenspan for not recognizing the post bubble tsunami.

5. Subprime lending and "Innovative" mortgages and lack of lending due diligence.

6. Predatory lending (classic bait-and-switch used by Countrywide, etc).

7. SEC relaxing the net capital rule in 2004 which enabled investment banks to substantially increase the level of debt
they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages.

8. SOME of Wall Street... for promoting a flawed, highly leveraged, CDO investment whose risk they didn't comprehend

9. Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, AIG et al

10. Credit rating agencies for grading "shit as sugar".

11. Greedy investors levering up to load on the perceived "risk free return".

12. Raising Fed funds rate significantly between July 2004 and
July 2006 increasing in 1-year and 5-year ARM rates, making ARM interest rate resets more expensive for homeowners, contributing to the deflating of the housing bubble,

LOOK OUT BELOW !!!!!!!!!!



And now it's time to make traders pay for the sins of others? If a trade tax this large is passed, wait until they see the liquidity dry up and further decimation of the financial system.
 
Quote from loufah:

This has been discussed at length elsewhere here, but yes, though there are exemptions (mutual funds, trading done in an IRA or 401(k), pension funds, and the first $100K of everything else will be tax-free), the goal is to skim some off the top of speculative traders who don't do anything socially redeeming. Buy-and-hold investors will be fine. Scalpers will probably have to switch to futures (which will be taxed at only .02%), or options, or find another line of work.
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Please help me to understand your statement: "the first $100K of everything else will be tax-free." Does it mean that if you have a trading account of $1,000,000, and you buy stocks worth only $100K, then you will not be taxed? Or will you be taxed because your trading account exceeds $100K?

If the $100K in transaction if tax free regardless of your trading account size, then people can get around the tax by spreading the money among various brokerage houses or having many trading accounts or trade smaller fraction of their accounts so that each trade is less than $100K, similar to putting $200K into 2 FDIC-insured accounts.

Or am I still missing something?
 
Quote from TimeCorrosion:

If the $100K in transaction if tax free regardless of your trading account size, then people can get around the tax by spreading the money among various brokerage houses or having many trading accounts or trade smaller fraction of their accounts so that each trade is less than $100K, similar to putting $200K into 2 FDIC-insured accounts.
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No, it's not a per-transaction credit. The likely implementation is that you get taxed on all transactions that are not mutual funds and not in a tax-advantaged account, but then you get a single credit of up to $250 at the end of the year.
 
Quote from loufah:

Buy-and-hold investors will be fine.
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Buy and hold investors are always fine because for the most part they don't live off the market and have other sources of income. The door is going to close for those who dream to become rich in the stock market.
 
Quote from loufah:

No, it's not a per-transaction credit. The likely implementation is that you get taxed on all transactions that are not mutual funds and not in a tax-advantaged account, but then you get a single credit of up to $250 at the end of the year.
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0.25% of $100K is $250. That means you have one tax-free trade per year.
 
. Even though Goldman would be exempt from paying the tax, it would not be shielded from the collapse of mkt liquidity that would result from the tax. For this reason I believe that the chances fo this becoming law are slim. If this crazy idea is held at bay for just a few months-untill the runup to the congressional midterms- I think it will be shelved indefinitely.
 
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