I’m skeptical of new federal taxes given my preference that the U.S. government reduce its spending as its main deficit-reduction method. Today I learned of a proposed tax I can tolerate, deficit or not. The House of Representatives will push a tax on stock, bond, and equity trades. I’d like to see that tax on stock trades come down from 0.5% to a more reasonable 0.1% just like for bonds, but that can be worked out in committee once Wall Street lobbyists start screaming.
I can live with this tax because it will be a smack in the face to high-frequency traders that currently drive the vast majority of the volume on the major exchanges. The small investor who socks away a few hundred a month won’t miss an extra buck or two, but the hedge funds gambling with endowment money will have to seriously redesign their algorithms. A transaction tax will probably destroy strategies that seek minute pricing differences every split second. It will probably not hurt event-driven strategies like merger arbitrage or news release plays that don’t require constant churning, but those strategies are far simpler to execute than something requiring math wizards.
The only drawback is that an additional 0.5% tax, on top of the potential increase in taxes on dividends to fund the inexorable deployment of nationalized health care, will reduce the after-tax return on equity investments to just about zero in a low-growth, low-interest rate environment. I don’t believe low interest rates will hold if the bond market revolts against the dollar, so a spike in real rates would immediately crash U.S. stock markets and the housing market. Suckers who buy stocks now can look forward to zero or negative returns for a long time, but hey, at least their financial transaction taxes on their vastly reduced capital will be negligible.
BTW, this tax wouldn’t be so necessary if Washington would cut unsustainable spending first, but that won’t happen with so many Americans now addicted to EBT, disability pay, Social Security, and Medicare. Transaction taxes will be popular with the proles who want to stick it to fat cats. America – love it or leave it.