Call it the tax idea on trading that just won’t die.
Trading industry lobbyists dismissed a recent call for yet another proposal for a new securities transaction tax, predicting it would never win congressional approval.
"This is an old idea that has been recycled time and again. We are very strongly against it," said Travis Larson, a spokesman for the Securities Industry and Financial Markets Association. The proposal has not been offered as a bill at this time. The Security Traders Association is also on record as opposing such legislation for a transaction tax.
This plan calls for a tax of between 0.10 percent and 0.25 percent on each securities transaction. It is backed by labor unions, a Washington, D.C.-based liberal think tank, and Rep. Stephen Lynch, D-Mass. A spokesman for the AFL-CIO didn’t return phone calls seeking comment.
Lynch is a member of the United States House of Representatives Financial Services Committee. He was not available for comment. Last year, at the height of the market meltdown, Rep. Peter DeFazio, D-Ore., proposed a 0.25 percent (25 basis points) transaction tax to offset government bailout costs to the financial industry. The legislator’s call for a tax never gained traction and was not approved.
The latest version of the tax plan began in congressional testimony given by Lawrence Mishel, president of Economic Policy Institute on Oct. 8. Mishel described to a subcommittee of the House Ways and Means Committee how the tax could be phased in over two years and should be permanent.
Critics contend that the tax would hurt price discovery, increase volatility and hurt liquidity. They also say that it would lead dealers to go abroad in search of markets where the tax didn’t exist. Critics have said a tax, however small, would kill off the high-frequency trading firms, which account for as much as two-thirds of all volume in equities today, according to some estimates.
The tax, supporters say, would raise about $100 billion to $150 billion a year. Credit card transactions would be exempted from the tax. And money generated by the tax would be used for various public works projects. This is a key point, according to a critic of the proposed new tax.
"We are setting a dangerous precedent. Previously, a transaction tax has been used to pay for the costs of regulation and only regulatory costs," said Paul Zubulake, a senior analyst with the Aite Group, a Boston-based consulting firm.
He warned that, once the proceeds of a transaction tax are used for things other than regulatory costs, "there will be no end to this tax."
New revenue from the tax could be used to create jobs, he added.
"Such a tax would be levied on both the buyers and sellers of all financial instruments–stocks, bonds, derivatives, etc. Think of it as a small sales tax on financial transactions, somewhere between 0.1 percent 0.25 percent of the value of a transaction," according to Mishel. He was not available to enumerate on his recent comments to Congress and "was not available" to speak to Traders Magazine.
Nevertheless, in his testimony he justified the tax plan by arguing that the financial sector caused the current recession. Therefore, it should pay the costs of bailing out huge financial institutions, he added.
"A financial transaction tax," Mishel told lawmakers, "seems an entirely sensible vehicle to provide the revenues we need to support federal spending and for offsetting the costs of the current jobs package."
Still, Aite’s Zubulake also objected that the 10 to 25 basis points would be "disastrous." It would drive some liquidity providers out of the business, namely the high-frequency kind, or send business offshore, he predicted.
A 2003 study by the International Monetary Fund found the imposition of a transaction tax hurt Swedish brokerages in the 1980s. The tax was later abolished by the Swedish parliament in 1991.
"The Swedish experience highlights the following points," according to the study, "Securities Transaction Taxes and Financial Markets." First, investors go offshore to avoid the tax, the IMF wrote.
"Second, markets suffer greatly following the imposition of the tax. Even very low tax rates on fixed-income instruments led to an 85 percent decline in volume in the first week the tax was imposed compared to the pre-tax average. Third, after removal of the tax, the trading volume gradually comes back across all previously taxed assets," according to the study.
Zubulake also contended that trading volume would decline if a trading tax were imposed at the suggested rates. Many dealers, he added, would find it uneconomic to provide liquidity.
"They might live with a penny tax, but a dime will kill many of them," Zubulake warned. "They’ll go elsewhere." With fewer liquidity providers, he argued, the average retail investor will find costs going up, he added.
Still, trade industry lobbyists questioned if this tax idea is a serious one. They were very confident that once again the securities transaction tax plan would be easily defeated.
"We’ve beaten this back a number of times and we expect to do so again," said a securities industry lobbyist who didn’t want to be quoted by name.
But Zubulake wasn’t so sure and suggested that some might be overconfident.
"In this kind of anti-Wall Street environment," he warned, "it’s just possible that this kind of tax could pass."
