Monday, December 7, 2009

Let Wall Street Pay for the Restoration of Main Street Act of 2009

This idea of taxing the trading has been around. Each time it went nowhere, but this time it may actually go somewhere, with unintended but totally predictable consequences. Nancy Pelosi even wants to make it a "global tax".

Pelosi Endorses ‘Global’ Tax on Stocks, Bonds, and other Financial Transactions (Matt Cover, 12/7/09 CNS News)

"( – House Speaker Nancy Pelosi (D-Calif.) endorsed the idea of a “global” tax on stock trades and other financial transactions, saying the estimated $150 billion in annual revenue from such a tax could be used to help fund more stimulus spending.

"At her weekly press briefing on Thursday, Pelosi said the financial transactions tax (HR4191) currently before Congress would have to be made “global” to keep U.S. investors from taking their business overseas and out of taxable reach."

And where does she think the money is going? A second stimulus, of course.

"The House speaker said that a transaction tax could be imposed in conjunction with congressional efforts to divert funds from the Troubled Asset Relief Program (TARP), with funds from both going to fund a second stimulus spending package. (The first stimulus bill, $789-billion, was signed into law by President Barack Obama on Feb. 13, 2009.)

"“I believe that the transaction tax still has a great deal of merit,” Pelosi told reporters. “The concern that many of us or others have had is that it will send, it will send transactions overseas.""

They want to divert TARP funds and this proposed "Wall Street tax" into a second stimulus to stimulate job creation. The first stimulus has been a great success, so far having created 600,000 jobs, as the administration claims. The cost per job estimate ranges from $70,000 to $250,000, and the stimulus spending to create such jobs include $30 million for pro baseball spring training camps and $4000-per-bike bike locker and garage (see here).

Now, let's take a look at the actual bill, H.R. 4191, shall we?

H.R. 4191 was crafted by an Oregon Democrat Peter DeFazio and the bill was introduced in the House on December 3, 2009.

Section 1 is the preposterous official title: Let Wall Street Pay for the Restoration of Main Street Act of 2009.

What a joke. As you will see, it is more like Let Main Street and Wall Street Pay for Both Ends of Pennsylvania Avenue Act of 2009.

Section 2 lists 12 reasons why DeFazio and his cosponsors believe this bill must pass [my comment in bold italic]:

(1) Our Nation continues to be hamstrung by a recession that led to the current jobless recovery and record deficits. [Well, that's partly thanks to you, government and the Fed.]

(2) The unemployment rate is now 10.2 percent and most economists expect it to climb higher.

(3) The Federal deficit has reached $1,400,000,000,000 for 2009. [That's your problem, not Main Street or Wall Street.]

(4) The jobless recovery suggests that the Federal Government must continue to prime the economy, but the record deficit is a real obstacle. [That's what you think, but there are a lot of people who totally disagree with you.]

(5) Following their $700,000,000,000 bailout, Wall Street is now enjoying a resurgence in profits and bonuses.

(6) A robust economy needs more than Wall Street profits. Main Street America is strengthened by good paying jobs for all Americans, not just Wall Street bankers.

(7) To restore Main Street America, a small securities transaction tax on Wall Street should be invested in job creation for Main Street America. [Who will invest? You, the government, who has created a record deficit, the highest in peacetime history of the U.S.?]

(8) A securities transaction tax on Wall Street has a negligible impact on the average investor and pension funds. [How can you say that, when the actual tax you are proposing is on all securities transactions done by all investors big and small, not a surtax only on Wall Street firms?]

(9) This transfer tax would be assessed on the sale and purchase of financial instruments such as stocks, options, and futures. A quarter percent (0.25 percent) tax on financial transactions could raise approximately $150,000,000,000 a year.

(10) The United States had a transfer tax from 1914 to 1966. The Revenue Act of 1914 (Act of Oct. 22, 1914 (ch. 331, 38 Stat. 745)) levied a 0.2 percent tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help financial recovery and job creation during the Great Depression. [During the Great Depression, did this transfer tax help financial recovery and job creation? History says otherwise. It was more likely to have been another obstacle for real recovery.]

(11) Half the revenue generated by this transaction tax will be used to directly reduce the deficit.
[Yeah right. Nancy doesn't say anything about deficit reduction, does she?]

(12) Half of the revenue generated by this transaction tax will deposited in a Job Creation Reserve to fund the creation of good paying jobs and put Americans back to work rebuilding our Nation. [Good paying jobs were in manufacturing. Manufacturing firms have very little incentive to bring the jobs back. They are not coming back.]

Section 3 talks about the creation of the "Job Creation Reserve" from half the receipt of this proposed tax. Jobs have to be paying at least the median wage, and come from manufacturing and "other jobs we are losing to unfair overseas competition". The U.S. government once said that a foreign language spoken in a foreign country was an unfair trade barrier.

Section 4, short and strange, talks about the deficit reduction part of the deal. "It is the Sense of Congress that half the additional Federal receipts by reason of the enactment of this Act shall not be expended and therefore reduce the Federal deficit."

The "Sense of Congress" means that they think it is a good idea to do so, but it's just an opinion and nothing more; nothing is binding here to use half the tax receipt for deficit reduction. (Read this explanation about the term.)

Section 5 is where the details of this trading tax are spelled out.

  • 0.25% tax on transactions (buying and selling) of stocks, futures, swaps, CDS, and options
  • IRA accounts are exempt, so the investment in mutual funds
  • Covered transaction - any purchase/sale made in the U.S., any purchase/sale made by a U.S. person (Nancy Peloci wants to make this global - any purchase/sale made anywhere by anyone).
  • $250 credit allowed against the tax
  • First $100,000 transactions per year are exempt

$100,000 transactions don't amount to much at all. Say you buy 100 shares of GLD, a gold tracking ETF. Currently it is $113.23. 100 shares cost $11,323. GLD goes to $120 and you decide to take profit. You sell 100 shares for $12,000. The round-trip transactions amount to $23,323, already near 1/4 of $100,000. Many, many retail investors and traders trade shares, options, futures more than 4 round-trips per year. Many of them trade more than 4 per week, if not by day or hour.

Far from "not affecting small retail investors" as they claim, the tax hits them directly. The total transaction cost per trade, which is very low thanks to online discount brokerages (some of them offer $0 commission), will skyrocket. In the above GLD case, if I use the commission of my broker, the transaction cost per trade is currently $8. Under the proposed tax, this will become $8 plus 0.25% of $11,323, which is $36.31. That is 354% jump in trading cost.

Instead of punishing Wall Street, this will end up punishing Main Street investors and traders who try to recover what they've lost by participating in the stock market. (Remember, this is a jobless recovery...)

"Punishing" Wall Street idea seems bizarre to me to begin with. Congress was the one who gave Hank and Ben the TARP money, against overwhelming objections from taxpayers. Congress couldn't pass up an opportunity to tack on their pet projects. Hank proceeded to half threaten the bank CEOs to accept the bailout capital injection.

This blog has reported on this trading tax on a few occasions, and my fear remains the same: this time they will pass this labor union-supported (by AFL-CIO) piece of you know what.


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