WHY TAXING STOCK TRADES IS A REALLY BAD IDEA

January 7, 2010

The Democrat-dominated Congress has come up with a new way for President Obama to violate his campaign pledge to not raise taxes on families earning less than $250,000 per year.  It's a tax on securities transactions -- trading in stocks, options, futures and so on.  And why not single out trading for special taxation?  We levy special taxes on tobacco, alcohol and other vices.  Except that trading isn't a vice.  The exchange and hedging of business interests is a virtuous -- and utterly essential -- activity in a free economy, say Donald L. Luskin, chief investment officer at Trend Macrolytics LLC, and Chris Hynes, chief executive officer of Hynes Capital.

Setting aside the critical issue of why certain types of securities are singled out for tax and others are not, the tax as currently proposed does not even succeed in fairly targeting speculators as opposed to investors.  In fact, like most tax schemes, it is riddled with arbitrariness and capriciousness, say Luskin and Hynes:

  • Suppose you're an investor and you buy a stock and hold the position for 20 years.
  • Suppose the person who sold it to you was a day trader -- who might end up buying the stock again 10 minutes later from someone else and then selling it after an hour.
  • You both pay the same tax.

And don't believe the proponents of the tax when the say it's so small you'll never notice it, say Luskin and Hynes:

  • At one quarter of 1 percent, that would be a cost of $0.33 on a share of IBM.
  • If you were to buy or sell $100,000 worth of IBM (or any stock), the tax would be $250.
  • Single taxpayers would get an annual exemption of that amount, but trade again, and you're taxed $250; again, another $250, over and over.
  • Each time, that's about 20 times the commission that a typical online broker would charge you to make that trade -- yes, the greedy broker, the one on Wall Street.

Source: Donald L. Luskin and Chris Hynes, "Why Taxing Stock Trades Is a Really Bad Idea," Wall Street Journal, January 6, 2010.

For text:

http://online.wsj.com/article/SB10001424052748703580904574638731631345994.html

 

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