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December 14, 2009

2009 Review: Trading Tax Scare

Washington Strikes Back

By James Ramage

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Like a horror-movie monster, the trading tax shambled back from the dead in 2009.

Politicians seeking to force Wall Street to pay for its role in the financial crisis and subsequent bailout resurrected the idea of taxing transactions. The idea was floated at least twice during the year, and it's not dead yet. Two congressmen's plans this year called for a tax of between 0.10 and 0.25 percent on each securities transaction.

At its worst, industry experts said, such a tax would dramatically increase trading costs, widen bid-ask spreads, kill off high-frequency market-making firms, slash volumes and move trading to overseas markets.

Duncan Niederauer, chief executive of NYSE Euronext, said in a third-quarter conference call with analysts that a transaction tax in the regulated markets has little chance of gaining a foothold. But if it does, it could hurt volumes in all venues, he said.

Jeff Bell, of Wedbush Morgan Securities' clearing and technology group, told Traders Magazine earlier this year that a trading tax would put the kibosh on the entire high-frequency business.

But such a tax--which supporters say would raise about $100 billion to $150 billion a year--is backed by labor unions, a Washington, D.C.-based liberal think tank and Reps. Stephen Lynch, D-Mass., and Peter DeFazio, D-Ore. Lynch is a member of the House of Representatives Financial Services Committee.

In February, at the apex of the market meltdown, DeFazio proposed a 0.25 percent (25 basis points) transaction tax to offset the federal government's Troubled Asset Relief Program.

But his bill--H.R. 1068: Let Wall Street Pay for Wall Street's Bailout Act of 2009--was heavily flawed and lacked sufficient support on the Hill, critics argued. Essentially the same bill failed to gain traction a year earlier.

On Sept. 26, 2008, DeFazio introduced the similar H.R. 7125--Let Wall Street Pay for Wall Street's Illiquid Assets Act of 2008. Then, as now, the bill called for a transaction tax of 25 basis points "of the value of the instruments involved in such transaction," according to the bill.

Details for the latest DeFazio bill have yet to be worked out. As written, the bill would amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions enough to recoup the net cost of the TARP.

"I am throwing it into the mix," DeFazio said shortly after H.R. 1068's introduction, "but I have no expectations."

Both of his bills were referred to the House Committee on Ways and Means. Both have gone nowhere.

"It got some traction [in September 2008] with blue dogs and others who are concerned about the size of our debt," DeFazio told Traders Magazine in March. "It is one idea about how to deal with the TARP money that is fair and equitable, and I think deserves to be a part of the conversation, so I introduced it again."

There is precedent for such a tax. The U.S. imposed a transfer tax of 0.2 percent on stock trades between 1914 and 1966.

The latest version of the tax plan began after Lawrence Mishel, president of the Economic Policy Institute, testified before Congress in October. Mishel described to a Ways and Means subcommittee how the tax could be phased in over two years and should be permanent.