Bad Idea: H.R. 1068

Congress is considering legislation to impose a securities transaction tax of 0.25% on every stock trade, which of course is equivalent to 0.5% for each round trip.  It’s known as H.R. 1068: Let Wall Street Pay for Wall Street’s Bailout Act of 2009.

As currently written, the bill amends the Internal Revenue Code of 1986 to impose a tax on certain securities transactions.  The authors presume it will produce enough additional revenue over time to recover the cost of the $700 billion Troubled Asset Relief Program.  Representative Peter DeFazio, D-Oregon, authored the bill.

This bill takes the “law of unintended consequences” to new extremes.  You and I did not create the problems of Wall Street.  You and I did not receive any Bailout Dollars.  As taxpayers, you and I are already paying for the TARP.  To start charging us 0.5% for each round trip trade is only adding insult to injury.

If you have portfolio turnover of 100% per year, then this tax represents a 0.5% per year burden.  If you are a more active trader, perhaps with an average holding time of 25 days, then it robs you of 5% per year.  If you do multiple trades a day, then forget it – you are out of business.

If active traders are removed from the market, what happens to volume?  It will dry up, of course.  Then you and I will be paying more for each transaction in the form of an increased bid/ask spread.  The bill claims to recoup the cost of TARP, but I bet they did not factor in the severe volume reduction that the bill would create.

This proposal has a host of other problems, many of which are highlighted in a great article by James Ramage for Traders Magazine entitled Industry Fears Proposal in Congress Would Destroy High-Frequency Trading and Liquidity.

This bill will hurt too many people, and they won’t be the people it is intended to hurt.  A ground-swell of opposition is already forming, but with the public’s current anti-Wall Street mood H.R. 1068 could still slip through.  If you see the folly of this idea, let your Representative know how you feel.