Wednesday, October 19, 2011

Financial Transaction Tax - Bad Idea

Everyone is captivated by the Occupy Wall Street movement. While I do not want to discuss the actual events, I would like to express my concern about a possible derivative. It is not exactly clear what the main demands of the group are, but in the latest developments it looks like the movement may be used by some interested parties to push for a Financial Transaction Tax (FTT). This tax will be calculated on every financial transaction consummated on stock, bond, and forex markets.

I understand that frustration with Wall Street can cause the urge to make the banks pay for harm that has been done to the economy, and more importantly the people who are unemployed. But my view is that FTT will cause even more harm to capital markets, which will further complicate the economic recovery. I will not go into many details on why this tax is going to produce more bad than good, which have all been discussed by many scholars and economists. But I would like to concentrate on its biggest unintended consequence - the death of a small investor/trader. It will be practically impossible to engage in daily activity of trading and/or investing because of the extra burden FTT will impose. "Insignificant", "negligible", and "fractional" amount, as the politicians who want to implement the tax call it, will be enough to put any small professional trader and investor out of business. These are hard-woking middle-class folks who caused no harm, needed no bailout, provide daily liquidity in the markets, and pay their fair share of capital gains taxes.

I strongly suggest that politicians, who are pushing for this nonsensical levy, consider the harm they will cause by eliminating this important pool of liquidity, thus making markets more volatile, and reduce government's revenue due to lack of capital gains tax paid by small traders/investors who will be put out of business. Lawmakers should also weigh the fact that investment banks, mutual and hedge funds will eventually pass the tax on to the end customer - individual investor. More than 50% of Americans, who own stocks in their 401K and IRA, will be the ultimate bearers of this extra cost on every transaction in their investment portfolio.

Our politicians have already caused a stir with Dodd-Frank bill, which produced red tape in lending and extra bank fees. Financial Transaction Tax will make Bank of America's recently-introduced $5 monthly debit card fee look like a walk in the park.

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