The Independent Investor: Robin Hood Would Be Proud
By Bill Schmick On: 08:22PM / Thursday December 29, 2011
Taxes are not my favorite thing. Like everyone else, I would like to see less, rather than more, taxes in my life. However, there is one tax under consideration in Congress that I fully support
Some call it the "Robin Hood Tax" (part of HR 3313) because it supposedly taxes the rich and distributes the proceeds to the rest of us peons. It is a bit more complicated than that, but you get the idea. Some say the proposal surfaced as a result of the Occupy Wall Street movement. Others credit the late Noble prize-winning economist James Tobin for the idea. The basic thrust is to impose a financial speculation tax of .03 percent or $3 in taxes for each $10,000 in financial transactions.
Although it doesn't sound like much of a tax, its proponents claim it could generate as much as $48 billion or more per year if all G-20 countries signed on to implement the tax.
In Europe, where every nation is scrambling to raise money, the idea is supported by the European Commission in Brussels that would like to see as much as $10 per $10,000 tax in place throughout Europe by 2014. The Italians, under their new Prime Minister Mario Monti, is planning to impose the tax as part of his country's fiscal reform plan. Both the French and German leaders are on record as backing the idea and even Pope Benedict XVI came out in support of it.
In the United States, the idea has found surprising support among some strange bedfellows. Bill Gates, George Soros, Ralph Nader, Al Gore, the nurses union and the AFL-CIO among others. As such, a bill to impose a tax on certain trading transactions in financial markets (part of H.R. 3313) is working its way through Congress. All the sponsors of the bill are democrats.
Republicans oppose it, which should come as no surprise since the vast majority of Republicans won't even read a proposal to raise taxes of any sort. Surprisingly, the White House and Britain's Prime Minister David Cameron are less than enthusiastic about it. Both feel it might jeopardize their country's leadership positions within financial markets where such a tax may drive traders elsewhere to do their business. The White House also believes it would hurt pension funds and the banks.
In my opinion those are lame arguments and don't square with the facts. For instance, both Hong Kong and Singapore, two fast-growing financial markets, already charge a $20 per $10,000 transaction tax. Great Britain, the leading financial center in Europe, has had a stamp tax in force for 25 years called the Stamp Duty Reserve Tax on most paperless trades of companies located or registered in the UK. It has not impacted the financial status of those markets one whit.
The Securities Industry is against it (surprise, surprise) warning that such a tax would impede efficiency, depth and liquidity in the markets as well as raise costs to issuers, pensions and investors.
What the tax will do, in my opinion, is reduce the speculation in global markets while generating much-needed revenues. Speculation, in the form of High Frequency Trading (HFT) is the bane of our existence. These traders buy and sell blocks of stocks, bonds and exchange traded funds second by second, minute by minute in large volumes throughout the day generating thin but profitable trades that add up. They could care less about a company's earnings or its future prospects. When a stock drops, hundreds, if not thousands, of HFTs and day traders jump on the trade, like vultures over a wounded animal, they drive their victim to its knees before going on to their next prey, all in the name of profit.
A $3, $5 or even $10 tax on these transactions will crater that market and do much to reduce global volatility. Who knows, actual investing may come back into vogue and with it the retail investor. Sure, the tax may hurt the little guy but the individual investor usually doesn't trade 10 or 15 times a day at $10,000 a crack.
Detractors argue that it is not HFT but the circumstances of the market, such as the European crisis, that is responsible for the volatility. I agree that the problems we face worldwide do create volatility and always have, but the markets have never reacted with the level of violent swings and almost daily market volatility that we experience today.
So I say string your bows, Oh, ye Merry Men, let arrows fly and support this transaction tax.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at firstname.lastname@example.org. Visit www.afewdollarsmore.com for more of Bill's insights.
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You say the white house isn't enthusiastic? No kidding Obama received FAR more money from wall street than McCain. Funny how the occupiers refuse to protest in front of the white house even though their guy is just as complicit as the wall streeters.
Secondly, we will be punishing everyday people like me who invest in mutual funds. The costs associated with these funds will be passed on to slobs like me who are responsible enough to save for their retirement and the money will be given to those foolishly spending money now in hopes that social security will be there for them in the future.
Lastly PLEASE, PLEASE stop using the Robin Hood reference. Robin Hood took the peoples tax money back from the government and gave it back to the very people who had it taken from them. He did not take from the rich and give to the poor.
The proposed transaction tax in Europe would cost money markets 7.82% per year effectively destroying their existence. Google: joanna cound blackrock euro government liquidity 782bps
IMF states in the Final Report For The G-20, June 2010 about the financial transaction tax, "Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector.
Stamp duty in the UK is paid only by retail investors and placed upon the final purchase or sale. Financial firms and traders are exempt or there would not be a market. The purchase or sale of stock does not cost the investor the whole 0.5 percent. The UK tax is only on equities and is diluted within funds and results in an average of five basis points or 0.05 percent charge upon all investors regardless if they purchased stock.
The proposed financial transaction tax is even worse than the UK's stamp duty. This is a retirement tax that no tax break or exemption could cover a fraction of the losses. The FTT is a cascading tax with multiple transactions hitting us with the tax. Every time we buy, sell, move our money, our transaction sets off a series of transactions that will be taxed. The tax cascades from vendor to broker to clearing member to market maker to clearing member to broker to pension fund, etc. Every time a firm is taxed when we start that chain of transactions, their cost of the tax will be paid by us through reduced yields, much higher spreads and higher commissions and fees. A typical purchase by a pension fund or personal account would make the effective rate as much as ten times higher than the advertised rate. Bid-ask spread cost will increase many times greater than the tax when liquidity falls from diminished trading activity. Expect yields in pension funds and accounts to be reduced by 2 percent or more. An annual 2 percent yield loss will reduce the potential account yield by one half over a working lifetime.
Great Britain's economic sub-committee of the House of Lords regarding Europe's FTT proposal: "The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax."
From the UK's European Scrutiny Committee regarding Europe's proposed transaction tax using data from the European Commission that wants the tax so badly as their own source of revenue: "4.11 The Minister next discusses the Commission's impact assessment accompanying the proposal, saying that... a 3.43 % fall in EU GDP equates to a fall in economic output worth �421 (�362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs."
Swedish Finance Minister Anders Borg warns often that a financial transactions tax in Sweden saw implementation costs out-run revenues, and the tax itself achieved 3% of projected revenues-before subtracting negative revenues from reduced GDP.
Editor: It's hard for people (like me) who will never have $10,000 to invest at a clip to comprehend how a $3 transfer tax could hurt the market - especially when we're getting dunned $2 to $5 every time we electronically move far more modest funds. I Agree (6) - I Disagree (0)
It's hard to imagine that a group of some 535 (100 senators, 435 reps.) who are mostly millionaires would pass something like this without loopholes for themselves.
Through tax policy government does more than just raise revenue. It also creates incentives for (and against) certain behaviors. Consider the tax deduction for mortgage interest: the government creates an incentive for home ownership because we believe that owning one's home has positive social outcomes.
I don't know the details of this proposed financial transaction tax, but it seems to me that we must consider what (dis)incentives it might create. It seems clear that it would create a disincentive to participate in US financial markets. How large a disincentive? That depends on a lot of factors, but the direction is clear. It is clearly a disincentive.
A vigorous Wall Street is good for Main Street. Creating a disincentive for investment sounds ill-advised
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.