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Making Wall Street Pay

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November 11, 2009 – Comments (14)

Sometimes Jstegma likes to know what the left is talking about:

The logic of a financial transactions tax is simple. It would impose a modest fee on trades of stocks, futures, credit default swaps and other financial instruments. For example, the UK puts a 0.25% tax on the sale or purchase of shares of stock. This has very little impact on people who buy stock with the intent of holding it for a long period of time.

For example, if someone buys $10,000 of stock, they will pay $25 in tax at the time of purchase. If they sell the stock 10 years later for $20,000, they will have to pay $50 in tax. The total tax would be equivalent to an increase of 0.8 percentage points in the capital gains tax....

...A national sales tax will primarily hit the consumption of ordinary workers. People will pay for it in all of their everyday purchases. Food, clothing, medicine - everything will cost a bit more as a result of a sales tax. Poor and middle-class people will end up paying a larger share of their income in this tax. This is both because they spend a larger share of their income than the wealthy and also because they spend a larger share in the United States.

As reported by a NY Times editorial:

Last Friday, a huge crowd of fans marched in a ticker-tape parade in downtown Manhattan to celebrate the Yankees’ World Series championship. More than once, as the fans passed through the financial district, the crowd erupted in rhythmic, echoing chants of “Wall Street sucks! Wall Street sucks!”

14 Comments – Post Your Own

#1) On November 11, 2009 at 8:56 AM, ChrisGraley (29.88) wrote:

Stupidity is an amazing thing. That tax does nothing to curb Wall Street investment and everything to curb investments by individuals.

The slowing of liquidity in the market gives us the added benefit of a higher unemployment rate.

I wish we could tax stupid ideas about taxes.

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#2) On November 11, 2009 at 9:22 AM, AdirondackFund (< 20) wrote:

Way to go NYer's!  Win a World Championship, march down Broadway, from Federal Plaza past Wall St. and tell the Weenies of Wall St. to go f*ck themselves.  For those of us who are NYer's, we know what this means.  What you absolutely have to love about the Weenies of Wall St. is that they are like Al Queda in that they hide behind human shields, looking to impose taxes that only they can afford, through access alone,  and pay for by pawning off on their customers.

Until Goldman Sachs and their Government cronies are removed from Office, we simply do not have a Country.    

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#3) On November 11, 2009 at 4:17 PM, devoish (97.09) wrote:

#2 Stupidity is an amazing thing. That tax does nothing to curb Wall Street investment and everything to curb investments by individuals.

Care to explain?

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#4) On November 11, 2009 at 6:59 PM, rd80 (98.00) wrote:

This has very little impact on people who buy stock with the intent of holding it for a long period of time.

True enough for investors in individual stocks.  But it would have a significant impact on people who own stocks through mutual funds.   Per this Invesopedia entry, the average portfolio turnover for a managed domestic stock fund is 130%.  Under a 0.25% trading tax, the average fund would pay 0.65% of assets per year in this tax (.25% to sell, .25% to buy times 130% of the portfolio).

I just ran an online calculator with a 30-year investment horizon to see what 0.65% per year would do. Someone investing $500 per month in a 401k and getting 8% would have a little over $734k in 30 years.  That same scenario with 7.35% ends with $648k. 

I'd call that a tax hike on the typical middle class investor.

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#5) On November 11, 2009 at 7:53 PM, ChrisGraley (29.88) wrote:

And even for individual investors in individual stocks it's a quagmire! Does the same tax apply to my dividend? What if I sell the stock right after the company pays a dividend at a very small loss? Do I get taxed for that? Does the tax apply to my Roth IRA account? The fact that I'll have to hire someone to explain all that to me would be enough to say "screw stocks" and buy mutual funds. Err.. wait, I'm screwed there too.

Every post I read from you is trying to force everyone in the world to be a buy and hold investor or force them onto public health care?

Do you have any ideas where you aren't forcing me to do something?

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#6) On November 12, 2009 at 6:43 AM, devoish (97.09) wrote:

rd80,

Taxed or not, Turnover Kills, by Dale Wettlaufer (TMFRalegh). Run the spread again if the turnover rate is 14.8%. Please, I'd like to know. Perhaps mutual fund investors would be well served by discussions of mutual fund industry "turnover" and its costs, whether those costs go to the US Gov't or mutual fund managers.

ChrisGraley,

1) it is a transaction tax on stock trades, not a tax on dividend distributions. 2) it is a tax on stock trades, so yes. 3) yes again. 4) I would expect yes, it is not a tax on the asset appreciation.

Every post I read from you is trying to force everyone in the world to be a buy and hold investor or force them onto public health care?

The first half of that is not true, I have not posted on this subject before. Tax or  no, it would not "force" you to do anything except change your cost/benefit analysis. Just as allowing Private health insurers to renege on their sales promises changes the cost/benefit analysis of the value of my Private health insurance.

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#7) On November 12, 2009 at 7:17 AM, whereaminow (24.34) wrote:

ChrisGraley,

The little schemers are hard at work.  Too bad they have no idea what they are talking about.

Ah, but let it be remembered that the little schemers are dumbest of the dull, the ineffectual, and the downright cowardly.  If they had any brains or balls they'd take the world by storm.  Instead they plot and they plan, not their own future mind you, but yours.

Beware of the little do-gooders.  They might just be worse than the chicken hawks.  

David in Qatar

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#8) On November 12, 2009 at 7:28 AM, devoish (97.09) wrote:

David,

Thanks for reading. If only "truly free markets" actually existed somewhere....

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#9) On November 12, 2009 at 7:35 AM, whereaminow (24.34) wrote:

devoish,

Ah but there in lies the failure of your logic.  If "truly free markets" don't exist then they must not be the problem.  On the other hand, the government and its army of regulators has existed for over 4000 years, perhaps we can finally start blaming them?  Whaddya say?

David in Qatar

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#10) On November 12, 2009 at 7:34 PM, rd80 (98.00) wrote:

devoish,

Unless you're going to restrict everyone to index funds, a low turnover rate isn't practical.  You can argue, and I'll agree with you, that study after study shows that for most investors an index fund is a better choice than an actively managed fund.  

The point is that this tax is being pushed as something that won't significantly impact small investors.  That's false, those who choose actively managed funds or don't have the option of an index fund in their 401k accounts take a significant hit from this tax. 

Here are the numbers for the same scenario with a 14.8% turnover rate:

No trading tax:  $734k as before
With .25% trade tax and 14.8% turnover $723.5k

FYI Here are the turnover rates for some popular funds as listed on Yahoo.

Fidelity Magellan - 67%
Fidelity Growth and Income - 122%
Fidelity Equity Income - 33%
Fidelity Blue Chip Growth - 134%
Fidelity Balanced* - 198%
Vanguard 500 Index Investor - 6%
Vanguard Balanced Index* - 50%
Vanguard Windsor - 55% (from Vanguard, not updated on Yahoo)

*  These funds hold both stocks and bonds.  No breakdown provided on how much of the turnover is from the bond portion.  The proposed tax is on stock trades, so unless extended it wouldn't apply to bond trading.

For those who don't have the option of an index fund or choose to invest in actively managed mutual funds this is a substantial middle class tax.

Of course the funds could decide to move their trading operations offshore, then the Federal gov't, NY state and NY city lose not only the trading taxes they hoped to collect, but the income taxes and economic activity of the employees who's jobs were moved overseas.

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#11) On November 13, 2009 at 4:46 PM, devoish (97.09) wrote:

rd80,

Thanks for the work. One year ago (2?) there was talk about GlassSteagal chasing investors to England, where they have a .25% transaction tax.

Evidence says transaction fees from brokers aren't chasing investors into low turnover funds. IMHO, a lower transaction tax will not chase investors overseas either.

Dave in Qatar,

For 4000 years people have chosen Governments to set and establish rules to live by not the free market alternative, because Government and laws are always better. Get it? Some government is worse than others, Democracy is best of all so far, except the very short time periods of benevolent dictators which always become that which you fear. Our Democracy has moved toward that same corruption. The combination of business and State that is as bad or as good as Church and State.

But without elected Government, the wealthiest simply become the Governments you reject, unelected.

That people can be convinced to blame Democratically elected Gov't for not standing in the way of corporate rule is amazing to me and a credit to your marketing campaign. That they can be convinced to support policys of deregulation and central control that have driven many of them closer to poverty amazes me. That "small gov't" Repubs want to take the right of States to regulate their own health insurers and leave the insurers with only one Federal gov't to corrupt amazes me, because it was the first step toward todays financial problems. And that is not the same as the Single Payer I support. The States were prevented from requiring tighter lending/banking regulations. The Federal banking regs were a maximum, not a minimum. Single Payer and all federal regulations should be a minimum with any State or individual able to provide more for themselves at the State level.

Honestly, I don't think you believe what you tell us.

 

 

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#12) On November 13, 2009 at 4:49 PM, devoish (97.09) wrote:

rd80,

Thanks.

I do not believe that people who cannot be worried about high fees from brokers on trades will be worried about a much lower tax on trades. JMHO, of course.

David,

For 4000 years people have chosen to live with Government and try to improve it, than live without it. I think they know something you are not admitting to yourself.

 

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#13) On November 13, 2009 at 4:53 PM, devoish (97.09) wrote:

That sucks. I posted the long version and it seemed to get lost, so I posted a short version.

Now you have both.

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#14) On November 13, 2009 at 10:11 PM, rd80 (98.00) wrote:

No problem on the numbers.  If you or anyone else wants to double check or run a different scenario, all I did was assume turnover was one buy and one sell and multiply it by the tax, e.g. for the 14.8% turnover, the annual return is reduced by .148*(.25% + .25%) = 0.074%; for 130% turnover reduction is 1.3*.5% = 0.65%

Then I plugged the numbers into this calculator with all default values except - annual savings amount = $6000 and marginal tax bracket set to zero (assumes 401k type account).  For the base case, the default 8% return is used.  For the 'with trading tax' case, the default interest is reduced by the trading tax reduction noted above, e.g.. for the 14.8% case return was 7.926%.  The savings value was the highest number from the results table. 

As usual, suspect neither of us changed the other's mind, but I enjoyed the debate.

 

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