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.CommentsClose CommentsPermalink

(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”