Trader Tax Bill and Petition

Feb 22, 2009: 12:48 PM CST

A reader requested that I pass this information on to readers and encourage you to take action (call your Congressperson, sign the petition, make others aware) because your future as a trader just might be at stake.

On February 13th, Congressman Peter DeFazio introduced House Resolution 1068 which seeks to impose a 0.25% tax on all securities purchases including stocks, futures contracts, and options as an effort to force Wall Street to pay for the TARP Program.  Under the auspice “Wall Street got us into this mess – let Wall Street get us out,” Congressman DeFazio (and supporters) doesn’t seem to understand how this will affect our industry, particularly as retail/at-home traders who are trying to make a living trading the markets, not to mention the ramifications it will have beyond that (in terms of Mutual Fund expenses, retirement accounts, and other such ‘butterfly effects’ that will affect anyone who buys or sells stocks).

There is an online petition to sign which also explains more about the proposed legislation and describes how you might be affected.  Quoting from the petition:

“First, many hard-working Americans make their livings by running small businesses that trade stocks, options and other financial instruments. Many of whom will be put out of business due to the fact that their margins are often quite thin. In addition, those who work for or with these individuals will also lose their jobs.”

“Finally, such a tax will undoubtedly affect the number of shares traded on an absolute basis, thus reducing liquidity – a necessary ingredient in the effective pricing of assets.”

“The body of the bill suggests that such a tax would have a negligible impact on the average investor. I beg to differ. For example, a $10,000 trade (or approximately 100 shares of stock in Apple, Inc.) would increase the cost of a round trip transaction by $50.”

There’s a discrepancy in what the online petition states, and what the actual proposed bill states.  You can read the entire text of the proposed bill through OpenCongress.org’s page on HR 1068.  You can also read it at the Library of Congress site (link).

The actual bill states the following:

(a) Imposition of Tax– There is hereby imposed a tax (0.25%) on each covered securities transaction an amount equal to the applicable percentage of the value of the security involved in such transaction.

(b) By Whom Paid– The tax imposed by this section shall be paid by the trading facility on which the transaction occurs.

I’m not clear on whether the individual must pay the tax of the “trading facility” must pay the tax, or perhaps the trading facility would impose the tax on each client and then pay the tax.

Oh, and if you think this can’t happen, the bill states the following in its “Reasons” section:

(7) The United States had a transfer tax from 1914 to 1966. The Revenue Act of 1914 (Act of Oct. 22, 1914 (ch. 331, 38 Stat. 745)) levied a 0.2 percent tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help overcome the budgetary challenges during the Great Depression.

And also from the Reasons Section:

(5) The easiest method to raise the money from Wall Street is a securities transfer tax, a tax that has a negligible impact on the average investor.

(6) This transfer tax would be on the sale and purchase of financial instruments such as stock, options, and futures. A quarter percent (0.25 percent) tax on financial transactions could raise approximately $150 billion a year.

Read the text of the entire bill (it’s not that long) and take action (write, call, email) if you feel it appropriate.

I cannot underscore how devastating this bill would be to most of the people in the active retail (at-home) trading community, other bloggers, and other ‘average investors’ (through the law of unintended consequences) if this bill passes and it does wind up costing 0.25% to buy and sell (or just even on one side of the transaction).

As a hypothetical, If you traded a $100,000 account (full dollar value) each day and assume the 0.25% tax would be levied on one side of the transaction (say, the buy), then you would have to pay $250 per day in tax, which is $1,250 per week, or $5,000 per month… which is $60,000 per year.

I don’t even need to tell you how quickly that would put you out of business and end your retail trading career.  You think you can make a 60% return on your $100,000 every year from here on out… just to break even?

Let’s make sure this doesn’t get signed into law.

Corey Rosenbloom
Afraid to Trade.com

Update:  Robert Green of “Green Trader Tax” tackled this issue on his website as well.

Tim Sykes – in colorful fashion – shared his thoughts in “Why Peter DeFazio’s Plan Stinks“.

Dr. Steenbarger also writes a post “Punishing the Wrong Group.”

John Lee’s take at Seeking Alpha:  “Trader Tax:  A Bad Idea”

21 Comments

21 Responses to “Trader Tax Bill and Petition”

  1. Andrew Stanton Says:

    The current disaster was caused by unregulated OTC derivatives, which don’t seem to even be mentioned in the bill; so let’s tax regulated stocks, options, and futures!

  2. Anonymous Says:

    By the way, DeFazio has been chipping away year after year trying to get this Bill passed SINCE 2000. Thus, his claim that this is to pay for TARP is totally misleading.

  3. Lisa Says:

    Anonymous,
    Exactly what I was going to say. DeFazio has been pounding the table with this bill, and finds a “new” reason every time

  4. Corey Rosenbloom Says:

    Andrew,

    It’s just Washington gone amuck. Tim (Sykes) also posted about how the short-selling ban was ‘effective’ seeing as that companies still managed to trade to multi-year lows after that debacle last year.

    It’s up to us to stand up and try to let our representatives know what we think now because they’re clearly not going to think for us.

  5. Corey Rosenbloom Says:

    Anon,

    That’s true, but it just might pass this time because of all the public outrage and Democratic Congress.

    We have to write & call to make sure it doesn’t happen and he doesn’t get his way.

  6. Corey Rosenbloom Says:

    Lisa,

    Agreed, but you just can’t take anything for granted now, particularly when it’s a direct threat to so many traders’ way of lives.

    If no one speaks up and the bill passes, what then?

  7. Andrew Stanton Says:

    Right Corey and “change” means appointing a different set of Goldman Sachs perpetrators.

  8. Anonymous Says:

    Put the tax on all those exotic derivatives generated by the banks,,,don’t take it out on stock trading investors.
    Maybe with a tax on the derivatives, exotic or otherwise, would make the irresponsible bankers a little wiser? I doubt it but it might be worth a try. Use some of the funds to regulate the irresponsible greedy jerks.

  9. Lisa Says:

    I signed the petition and will call Reps tomorrow. I take nothing for granted these days and “speak up” is my middle name 🙂 Thanks for all you do, Corey!

  10. linda Says:

    I vote noon the tax bill.

    Linda

  11. linda Says:

    I vote no on the tax bill.

    Linda

  12. Joe_in_Indiana Says:

    Also watch the following bill HR 676 where it is also introduced in Section 211.

    It’s in 2 places now!!!

    H.R.676
    United States National Health Care Act or the Expanded and Improved Medicare for All Act (Introduced in House)

    ——————————————————————————–

    SEC. 211 . OVERVIEW: FUNDING THE USNHC PROGRAM.

    (a) In General- The USNHC Program is to be funded as provided in subsection (c)(1).

    (b) USNHC Trust Fund- There shall be established a USNHC Trust Fund in which funds provided under this section are deposited and from which expenditures under this Act are made.

    (c) Funding-

    (1) IN GENERAL- There are appropriated to the USNHC Trust Fund amounts sufficient to carry out this Act from the following sources:

    (A) Existing sources of Federal Government revenues for health care.

    (B) Increasing personal income taxes on the top 5 percent income earners.

    (C) Instituting a modest and progressive excise tax on payroll and self-employment income.

    (D) Instituting a small tax on stock and bond transactions.

  13. Corey Rosenbloom Says:

    My gosh I wasn’t aware and I bet most traders aren’t aware of that either. That’s how controversial portions get passed – snuck in large “must pass” bills.

    Hopefully this is just in the ‘suggestion’ part of the bill rather than the actual law-to-be itself.

    At least in the Senate, amendments must be ‘germane’ to the bill. Not sure how germane trader tax is with healthcare.

  14. Iconoclast421 Says:

    If a tax like this passes, it will KILL the market. Let’s just say my prediction of DOW @ 1600 will be fulfilled. If it even looks like it has a remote chance of passing, I will go all-in on TZA, and then I’ll pay my stupid $50 tax on top of my $50,000 capital gains tax. ROFL

    I predicted the crash on sept 19th, because I knew the ban on short-selling would pull liquidity from the market. This tax would be 10 times as devastating. 10 million jobs would be lost in a matter of weeks after this passed. There is NO chance the establishment would ever allow a tax like this to pass, unless they are truly ready to implode the country.

  15. Anonymous Says:

    Its way worse for future traders. A one point gain on S&P Emini future (ES) is $50. Imagine paying a $170 tax on this trade. A trader’s income consists of large number of small losses and a small number of hugely profitable trades which compensate for the losses.

    This bill would simply mean an end to day trading, an end to the futures market and various software jobs that support data feeds, trading software, plugins and such.

    This bill has gone to committee. Write to the bill’s sponsors and every member of the committee asking them politely to kill the bill explaining your reasons.

    Also write to your congressman and Senator.

  16. llaszews Says:

    Just looked at this…bill looks good to me….
    1. Get rid of many stupid day traders that make and mostly loss money (people that probably end up going on welfare and therefore my taxes go up even more…) on day and nano trading….think this type of trading hurts investors like me.
    2. Example given distorts a real example:
    A. most stocks don't trade at the price of apple. I own mostly XZY (typically priced stock). So a sale of 100 shares is about $2,200 which would mean a tax of what…$15 dollars….
    B. most people (Joe the Plumber if you will) don't even own that many stocks

    From Web site: “The body of the bill suggests that such a tax would have a negligible impact on the average investor. I beg to differ. For example, a $10,000 trade (or approximately 100 shares of stock in Apple, Inc.) would increase the cost of a round trip transaction by $50.”

    I own more stock and make more money then most people and trade a total of $20,000 a year. This means that I pay $100 more in taxes a year…I am OK with that…over an increase in income tax.

    So, this is a tax the wealthy (and reckless day traders) tax which I am not sure is good or not but to get 'Joe the Plumber' worked up is a way of scaring the public so wealthly people can become more wealthy…now that is elitism….

  17. John Williams Says:

    You Trade only 20,000 a year, That is trivial. Most Pro day traders trade that per week if not daily. With this bill the market makers will have a field day scalping your investments, Good luck
    getting a fair price. With thin markets the big boys will manipulate the market and soon the SPY will act more like FXI.. Can you stomach 50% volatility on an average basis.

  18. John Williams Says:

    You Trade only 20,000 a year, That is trivial. Most Pro day traders trade that per week if not daily. With this bill the market makers will have a field day scalping your investments, Good luck
    getting a fair price. With thin markets the big boys will manipulate the market and soon the SPY will act more like FXI.. Can you stomach 50% volatility on an average basis.

  19. hankfreid Says:

    Yeah its very good article for businessman. Because they provide great guidelines the use of foreign currency. Thanks for this useful article.

  20. LadyinRed Says:

    Great article, people need to know about this.There can be good things coming with this petition.

    ______________________________________________________
    Foreign Earned Income Exclusion

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