Perhaps you’ve heard about a proposal to levy a tax on stock transactions. This idea actually began circulating about a year ago as a way to curb “speculation” in the market, subdue the market’s volatility, and raise tax revenue, according to its proponents. But, the notion resurfaced recently due to a push by the AFL-CIO to make such a tax a reality. Specifically, the powerful union would like to see a one-tenth of a percent tax on every stock transaction. According to union officials, doing so could raise as much as $100 billion a year in tax revenue.
Now, if you’re not an active trader, you might be tempted to think such a tax wouldn’t affect you. But, you’d be wrong – very wrong. Basically, this tax would impact you as long as you had money in the stock market – even if you’ve never made a trade in your life.
But, first let’s look at how it would impact individuals who trade from their homes, either as a hobby or as a career.
This tax would be on every stock transaction – meaning that if you bought a stock and then sold it, you’d be paying this tax twice.
On top of that, some of these proposals have the tax being applied to the transaction amount. So, let’s say you bought 1000 shares of Microsoft (MSFT) at $25. Your transaction amount would be $25,000. With this tax, you’d be paying a $25 surcharge on this purchase alone.
Imagine how this would penalize daytraders and other types of traders who make anywhere from several trades to hundreds of trades per week. And, remember, traders already pay taxes on every trade they make. But, you’re not a trader. So, why should you care what happens to frequent traders? Because the impact of the tax wouldn’t stop there.
Such a move would likely force many active traders out of the market. This alone would lead to less liquidity in the market – which would actually exacerbate the volatility in the market. And, the illiquidity would lead to bigger spreads – that is, the difference between the bid and the ask price. Which means that when you tried to buy a stock for your retirement portfolio – or when your financial advisor or mutual fund manager did the same – there would be a higher price to pay for that stock.
Speaking of mutual funds, did you know that mutual fund companies, brokerage houses, and hedge funds make an enormous chunk of their annual profits through trading – not investing? It’s estimated, for instance, that Goldman Sachs makes 70% of its annual revenue through trading-related activities. And, as for those staid, supposedly conservative mutual fund companies? On average, mutual fund managers turn over their holdings at a 93% rate per year.
Now, consider that under this tax, every time a firm such as Goldman Sachs or Fidelity or Charles Schwab bought or sold a stock, they’d be hit with an extra fee. When you consider the billions of stock transactions these and other investment firms make, the financial consequences would be alarming. Just think of the hit their profit margins would take. So, who do you think would ultimately pay for these fees? That’s right – their customers. And that means your neighbor, your co-worker, your best friend – and, of course, you. Maybe even worse, some of these firms might try to avoid this tax by rerouting their trading overseas, which would take away from the billions of dollars that the financial services industry generates for our country.
So, when you hear discussions about this proposed tax, pay attention. It’s not just some random tax that will impact daytraders – it’s one that will affect anyone who has money in the stock market. Including you. Fausto Pugliese is the founder and president of Cyber Trading University, a world leader in online education and training for traders and investors in the markets.
