Transaction tax stock trades

Posted: akex4098 On: 29.06.2017

One way for the Federal Government to raise more tax money and do some good in the process is to place a financial transaction tax FTT on the purchase and sale of securities.

This idea was promoted by the celebrated economist John Maynard Keynes in He hoped that levying a small tax on Wall Street securities transactions would dampen excessive speculation by poorly informed financial traders whose stock trading was increasing financial volatility.

Further versions of this idea were proposed subsequently by other economists but the idea never managed to gain Congressional approval. The idea surfaced again in from Presidential candidate Bernie Sanders. He called for a small tax on trades of stocks, bonds, derivatives, futures, options and other securities.

The Tax Policy Center made its own proposal and estimated that a one-basis-point transaction tax, namely 0. This windfall could be used for public good, for example to expand prekindergarten programs for 3 and 4 year olds and add college assistance funding for low-income students. Although the original purpose of a financial transaction tax was to slow down speculation and volatility, social activists favor this tax as a way to secure more fair and equitable tax collection.

The tax would discourage financial trading by lower income groups while raising tax money from higher income groups. The tax has a progressive income tax aspect in that higher frequency traders will be paying more, and they are disproportionately in high income groups.

Hopefully the financial trading tax will discourage high frequency trading which tends to increase volatility and destabilize financial markets. The tax does not need to weigh heavy on traders. Note, however, that this tax would be paid both by the buyer and the seller of the stock and therefore amount to 0.

transaction tax stock trades

Clearly this tax would yield a great deal of revenue when one considers the trillions of security transactions that take place around the world.

Today, a great number of persons purchase a mutual fund of stocks rather than individual stocks.

How are they to be taxed? The idea is that there would be no tax on the buyer who buys a mutual fund. The tax instead is paid by the mutual fund on every purchase and sale that it makes. Although the financial tax is largely thought of being imposed on equity trades, the case could be made that it should also be imposed on buying and selling bonds. Some countries tax transactions in both stocks and bonds, but at a lower tax rate on bonds.

Countries that depend on raising money by issuing treasuries have a concern because a tax on bonds would slow down their sales of treasuries. Therefore they may want to confine the financial tax to equities only.

A financial trading tax has sometimes been defended as serving an ethical principle. Wall Street is actually a gambling casino and the tax could be viewed as reducing the amount of gambling.

transaction tax stock trades

Many traders would need to find something more useful to do with their time than sitting all day buying and selling stocks. Representative Peter DeFazio Dem. The proponents of a financial trading tax on equities add that it will bring another benefit by reducing automated high frequency trading. This is where much more trading takes place than normal in the computer's search for a slight price difference and cashing in on it. Some trading firms sell their retail orders to high-frequency traders who take advantage of this early information.

There is the concern that automated high frequency trading could lead to computer-generated collapses and market manipulation. Those who oppose the tax charge that it will lead to fewer trades and this can reduce liquidity. There would be fewer people ready to make money available to others. The steeper the tax level, the more likely it is to reduce Wall Street trading and liquidity.

Critics say that the cost of capital will rise and lead to less innovation and growth and reduce the number of jobs. The historical evidence is inconclusive on whether a financial transaction tax actually weakens Capitalism and its competitiveness. Critics say that some trading would move offshore and reduce Federal taxes.

But with international coordination, the U.

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We can cite one case where the imposition of a financial transactions tax led to disappointing results. In January , Sweden introduced a 0.

In July , Sweden doubled the rate. Then in January , Sweden added a lower tax of 0.

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They levied a tax of 0. The revenues from these taxes were disappointing.

transaction tax stock trades

As taxable trading volumes fell, so did revenues from capital gains taxes. Share prices also fell. The cost of government borrowing rose. Sweden abolished the tax on fixed-income securities in In , Sweden cut the remaining taxes in half and by the end of year abolished the taxes completely. Thereafter trading volumes returned and grew substantially in the s. The Swedish FTT is widely considered a failure by design since traders could easily avoid the tax by using foreign broker services.

On the basis of this one case, one could argue that taxing stock trades is a bad idea. But one needs to examine the experience of dozens of countries that tax security trades. The reason for citing this one case is to emphasize the importance of moving into this tax slowly and trying it on a limited regional basis and being guided by the results.

What do you think? And please tell us what you think in the comments section below. Philip Kotler is the S. His most recent work is "Confronting Capitalism: Real Solutions for a Troubled Economic System. Visit us at www. Follow us on Twitter and Facebook. NEWS Highline Science Education Weird News Business TestKitchen Tech College Media.

Financial transaction tax - Wikipedia

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The Case for Taxing Securities Transactions. Is a Financial Trading Tax Justified? Why the Financial Trading Tax is Opposed Those who oppose the tax charge that it will lead to fewer trades and this can reduce liquidity. Conclusion On the basis of this one case, one could argue that taxing stock trades is a bad idea.

Questions must be answered such as: Should the tax only fall on stock transactions or include bonds as well? Should government debt be exempt? Should the tax fall on buyers or sellers or both?

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