Wall Street Trades Targeted for New Tax–Again

"Let Wall Street Pay for the Restoration of Main Street."
 
That’s the title of a yet new bill that would levy a securities transaction tax (STT) on most trades because the federal government recently bailed out several big financial institutions.

The bill is currently in committee, and its prospects for passage are unclear. Still, the topic of taxing trades has reared its head multiple times throughout the year. And now, as with each version introduced, critics have said any STT will hurt liquidity, pass costs on to end users and make the U.S. a less competitive environment in which to trade.

The bill, H.R. 4191, sponsored by Rep. Peter DeFazio, D-Ore., would assess a 0.25 percent tax on financial transactions, using the money to pay down the debt and create public sector jobs. It would be imposed on "stocks, futures, swaps, credit default swaps and options." But it would not be imposed on bonds. Pension funds and mutual funds would also be exempt from the tax.
 
The measure is aimed, in part, at "high frequency traders," sponsors and other supporters claim. H.R. 4191 would "slow the rampant speculation that has created such havoc in our financial markets," according to John Bogle, the founder of the Vanguard Group of Funds.
 
Why penalize some investors and traders?
 
"The American taxpayers bailed out Wall Street during the crisis brought on by its reckless speculation," DeFazio said in a written statement.
 
This latest STT proposal is an idea that has been offered several times in the recent past, but always defeated. A similar plan was mentioned earlier this year by Rep. Stephen Lynch, D-Mass, but never made it into the form of a bill.
 
But this time the bill has the support of the Speaker of the House, Nancy Pelosi. She said it has "a great deal of merit." She also said the U.S. might convince its foreign trading partners to make the STT a global tax.
 
In the bill, DeFazio says the tax would have "a negligible impact on the average investor and pension funds." The bill would also exempt from the tax the first $100,000 of transactions. DeFazio concedes the bill will have tough going because it has been introduced late in the Congressional session.
 
Sen. Tom Harkin, D-Iowa, says he is introducing a companion bill in the Senate. Senator Charles Schumer, D-N.Y., a member of the Senate Finance Committee and a key player in legislation that would affect the securities industry, didn’t respond to several requests for comment.
 
Senator Harkin said "there is no question that Wall Street can easily bear this tax."
 
Still, the securities industry disagrees. Several spokesmen and some industry observers say the STT plan would hurt the individual investor over the long run.
 
"This legislation is ludicrous," said Rich Repetto, a securities industry analyst with Sandler O’Neill and Partners. "No matter what sort of waivers they put in, there is a large risk that costs will be passed on to the end user."
 
Another industry observer said the plan would have unintended consequences.
 
"It will have an effect. This will amount to a large tax on the small trader," said Paul Zubuke, an industry analyst with the consultant Aite Group. Zubuke says a STT was tried in Sweden in the 1980s and later repealed because capital was going to nations without one.
 
Indeed, an industry official said it "would also put U.S. investors and businesses at a competitive disadvantage to the rest of the world," according to Kenneth Bentsen, SIFMA’s executive vice president for public policy and advocacy.
 
Although supporters say the average individual investor isn’t directly affected by a STT, securities industry officials agree that the tax would hurt high frequency traders. But they warn that these financial professionals would eventually pass on the costs to clients.
 
Rob Hegarty, director of market structure for the DTCC, said that mutual funds and pension funds today find liquidity from high-frequency traders on the contra side of their trades. Consequently, the entire market could see higher trading costs from wider bid-ask spreads, if high-frequency traders abandoned the market, he said.
 
"It will affect the entire market and that will certainly affect the individual investor," said Hegarty, warning traders could move elsewhere. "All things being equal," Repetto added, "liquidity will move to where it is cheapest to trade."
 
Still, supporters of the tax plan say it would bring in much needed new revenue. DeFazio estimates that H.R. 4191 would raise $150 billion a year. Money from the STT would be split between deficit reduction and the creation "of good paying jobs and put Americans back to work rebuilding our nation," according to the bill.
 
This is perhaps the most controversial part of the legislation. Previously, STT proceeds were to be used for the costs of regulating the securities industry. Now, with the nation in the midst of hard times and the government running record deficits, the STT has been proposed to reduce red ink and pay the costs of a new federal jobs program.
 
"We cannot wait for the next bubble to pull us out of a recession," DeFazio wrote in a statement. "We must invest in the future, our infrastructure and our middle class."
 
One reason why the bill may be a long shot is because the Obama administration doesn’t appear to support the plan.
 
Treasury Secretary Timothy Geithner, in a recent interview on Bloomberg Television, said he favors the STT idea provided it wouldn’t hurt the individual investor. "I have not seen a version of that that I think works," Geithner said.
 
The DeFazio bill has been referred to the House Ways and Means Committee. "We have no plans at this time to hold hearings on the bill," said Matthew Beck, a spokesman for the committee.
 
Securities industry officials privately say they hope it will never leave the committee.
 
"DeFazio offered this bill late in the Congressional session and we think it will die the way other STTs did," said an industry lobbyist who didn’t want to be quoted by name.

However, Aite Group’s Zubuke disagrees. "In this kind of environment, I have been warning that this kind of securities tax idea, destructive as it is, could get through."