Is this a good idea?

[Howie Felterbush]

It's the worst time of the year for Wisconsin Public Radio. Every day the usual schedule is eaten up with candidates for various public offices jabbering about how they're going to fix Wisconsin's various problems. These people are all idiots, and I have come to grips with this, but today, a caller brought up an interesting idea. He thinks the government (he was talking about the feds, not the Wisconsin state government) could raise a whole bunch of money by taxing each stock market transaction at the rate of one cent per share traded. At first, I formed a mental picture of guys in New York shuttling back and forth with huge bags of pennies, but the more I thought about it, the more it seemed like a suspiciously simple and yet workable idea. Anything that seems this simple is usually full of pitfalls that my simple mind either can not or will not see.

I don't know anything about the stock market, or economics or anything to do with money, other than I should be saving more and spending less. So, tell me why this idea wouldn't work.

My potential reasons why it wouldn't work:

1: The logistics of collecting one cent per trade in a market where there are zillions of trades per day.
2: Deciding who pays the tax, the seller or the buyer. I believe this could be a sticking point, as stupid as it sounds.
3: The effect on large volume trades. Would it be enough of a cost increase to keep people or firms from dealing a whole butt load of stocks at once?

Help me out, smart economics guys and gals. It can't be this simple, can it?

[ThatSoundAgain]

I don't know much about economics either, but am reminded of the idea that's sometimes floated over here (Europe) - The Tobin tax (http://en.wikipedia.org/wiki/Tobin_tax). That's more intended as a safeguard against disruptive speculation against currencies, though. Bill Gates had a similar idea to combat email spam (http://searchwinit.techtarget.com/news/column/0,294698,sid1_gci949091,00.html). The ideas are similar in that a very small expense for legitimate users gets prohibitively expensive for abusers of the systems.

(ETA: By the above I mean to suggest that you'd really want to do this with something you want to discourage. The current popular opinion of financial institutions being what it is, I'm not too surprised to hear such an idea. But stock exchange doesn't seem to me to be the kind of thing you want to discourage, generally.)

I can see a few problems with the idea of taxing stock exchanges per share, though. For one, it'd make for a less flexible financial market. That would hurt speculators, but also productive investments. Second, the shares and earnings are probably already taxed at various points. You'd also create a motivation to issue less, larger shares, but how that'd affect things I wouldn't dare guess.

On top of that, it really sounds like a "too simple to be any good" solution to me. Meaning that the idea as formulated is so simple it must have come from someone who can't possibly know what they're talking about. :D

As for the logistics, I'm sure the stock markets' systems could manage nowadays.

Like Howie, I'm a complete econoob, so feel free to educate me if necessary.

[timhau]

He thinks the government (he was talking about the feds, not the Wisconsin state government) could raise a whole bunch of money by taxing each stock market transaction at the rate of one cent per share traded.

I think a minute percentage of the total sum would be fairer; it doesn't make much sense to put the same tax on one share of Citigroup ($3.71) and one Berkshire Hathaway A-share ($114,499.99).

AFAIK the UK has had something like this (called 'Stamp Duty') for decades. I have no idea what their experiences with it are.

[Puppycow]

Timhau already mentioned the obvious point that this would arbitrarily penalize stocks with low per-share prices.
It would also arbitrarily penalize frequent transactions. Is that the intended effect? It would penalize the high-volume traders. But maybe that's what you want to do.
There are people with computers programmed to buy and sell automatically based on algorithms. Some people say this is good, others that it adds no real value.
I do know that Wall Street would really hate this idea. It seems like a populist idea meant to punish Wall Street. I don't really think the overall effect would be good though.

[SezMe]

The idea I read about was a .25% fee on trades. The idea is, in fact, to dampen speculative, short-term trading which has contributed to stock market swings.

[timhau]

I do know that Wall Street would really hate this idea.

Oh, sure. But something in the neighborhood of half a percentage point (which is what I believe the UK Stamp Duty is) is small enough to be irrelevant for the buy-and-hold investor who buys stocks directly or puts his/her money into index funds or passive ETFs.

I suppose it would be bad for those who insist on investing in actively-managed stock market funds -- the funds would be sure to pass the extra costs (plus interest) on their clients, and that might actually eat into their returns to a significant degree.

[drkitten]

I think a minute percentage of the total sum would be fairer; it doesn't make much sense to put the same tax on one share of Citigroup ($3.71) and one Berkshire Hathaway A-share ($114,499.99).

Why not? You pay the same commission on one share of Citigroup as on one of Berkshire Hathaway. Scottrade charges something like $7/trade, whether you're buying one share of Citi or a million shares of Citi (or one share of BRK.A).

[drkitten]

Timhau already mentioned the obvious point that this would arbitrarily penalize stocks with low per-share prices.

Not really. Who buys penny stocks a share at a time?

I've never seen this proposed as a per-share cost; it's always either a per-transaction cost (like commissions) or a per-dollar percentage. Either way, I can buy 10,000 shares of a stock at a dollar or 100 shares of a stock at $100 and pay the same.


It would also arbitrarily penalize frequent transactions. Is that the intended effect?

Yes. There's some evidence that day trading and programmatic trading act to increase market volatility (i.e. risk) without providing any offsetting benefit.

The other intended effect, of course, is to raise government revenues, which should make the deficit hawks happy -- except there aren't any actual deficit hawks.

It would penalize the high-volume traders.

No, just frequent ones. Buy one share or a million, the penalty is the same.

[ksbluesfan]

Why not? You pay the same commission on one share of Citigroup as on one of Berkshire Hathaway. Scottrade charges something like $7/trade, whether you're buying one share of Citi or a million shares of Citi (or one share of BRK.A).

Scottrade charges more if the price of the stock is less than $1.

[drkitten]

Scottrade charges more if the price of the stock is less than $1.

Hmmm. I didn't know that. Shows how much time I spend dabbling in penny stocks, I guess.

It makes sense, though; penny stocks are generally not traded on the major exchanges and so are more expensive and time-consuming to work with, so it costs Scottrade more to execute your order.

Oddly enough (checking the fee schedule), Scottrade does charge a two-cent/share fee for non-online accounts. No one seems to object to this as "arbitrarily penaliz[ing] stocks with low per-share prices." So the fairness of the proposed tax still seems a non-issue.

[pgwenthold]

Why not? You pay the same commission on one share of Citigroup as on one of Berkshire Hathaway. Scottrade charges something like $7/trade, whether you're buying one share of Citi or a million shares of Citi (or one share of BRK.A).

So effectively what you are suggesting is that it could be treated as a "sales tax" on transaction fees, right?

[drkitten]

So effectively what you are suggesting is that it could be treated as a "sales tax" on transaction fees, right?

That's certainly one way to implement it, yes -- although most sales taxes are imposed as a percentage of something, and this would be a fixed tax ($0.01/transaction) instead of a percentage of the fee (1% of the fee, so 7 cents for Scottrade and $1 for a broker charging $100/trade).

But it's not like this is unheard of, either. Most (American) jurisdictions impose a transfer tax (or recorder's fee or something) on real estate purchases -- you pay $100 for the privilege of buying a house. In many case this is a fixed fee, so you pay the same $100 to buy a shack as a mansion.

[timhau]

Why not? You pay the same commission on one share of Citigroup as on one of Berkshire Hathaway.

Well, yeah, but it doesn't make much sense to buy Citigroup shares one-by-one. My bank charges me a commission which is a tiny percentage of the value of the entire trade, but since there's a minimum charge of 24€ for overseas transactions, I pay the same commission for one share of Citi as I do for three thousand.

[drkitten]

Well, yeah, but it doesn't make much sense to buy Citigroup shares one-by-one.

So why are you worried about the tax structure on buying Citigroup a share at a time?

No one's proposed a per-share tax. The proposals are all either a per-trade tax or a percentage-of-value tax.

[timhau]

No one's proposed a per-share tax. The proposals are all either a per-trade tax or a percentage-of-value tax.

... except the one mentioned in the OP (which, of course, is not an official proposal of any kind):

These people are all idiots, and I have come to grips with this, but today, a caller brought up an interesting idea. He thinks the government (he was talking about the feds, not the Wisconsin state government) could raise a whole bunch of money by taxing each stock market transaction at the rate of one cent per share traded.

What I was trying to say, in a roundabout way, that implementing the tax like that wouldn't make much sense. If you had $115000 to invest, and you put it all in Berkshire-Hathaway A, you'd pay a one-cent tax. If you decided to buy Citi with that money, you'd end up paying over $300 in taxes; to me, that sounds like arbitrary taxation.

[maddog]

Help me out, smart economics guys and gals. It can't be this simple, can it?


My gut reaction is to oppose it, because I'm generally opposed to the government finding more ways to tax, since it never seems to find ways to cut spending, and always finds new ways to spend more.

But, since they just handed a boatload of money to Wall Street, then screw 'em!

I think the logistics would be easy enough to figure out.

[Howie Felterbush]

My gut reaction is to oppose it, because I'm generally opposed to the government finding more ways to tax, since it never seems to find ways to cut spending, and always finds new ways to spend more.

But, since they just handed a boatload of money to Wall Street, then screw 'em!
I think the logistics would be easy enough to figure out.

This was the caller's exact point. He figured that a tax on Wall Street would be palatable to the unwashed masses, and the one cent per share so miniscule that it was a natural winner of an idea.

So how much dough are we talking about here? How many shares are traded in a day? I said "zillions" but that's because "zillions" sounds like an awful lot. Anyone have a real number?

[Howie Felterbush]

What I was trying to say, in a roundabout way, that implementing the tax like that wouldn't make much sense. If you had $115000 to invest, and you put it all in Berkshire-Hathaway A, you'd pay a one-cent tax. If you decided to buy Citi with that money, you'd end up paying over $300 in taxes; to me, that sounds like arbitrary taxation.

If I have a five-dollar bill and I spend it on milk I don't get taxed, but if I buy cigarettes I do get taxed. Wouldn't this be arbitrary taxation, too?

(Not lipping off to you, I really don't know.)

[ThermionicScott]

So how much dough are we talking about here? How many shares are traded in a day? I said "zillions" but that's because "zillions" sounds like an awful lot. Anyone have a real number?

Today's trading volume for the DJIA was 4,360,190,000.

[Howie Felterbush]

Today's trading volume for the DJIA was 4,360,190,000.


Sweet merciful crap.

That's a lot.

[SezMe]

So how much dough are we talking about here? How many shares are traded in a day? I said "zillions" but that's because "zillions" sounds like an awful lot. Anyone have a real number?

Yesterday's NASDAQ numbers:
Shares: 2,201,326,587
Dollars: $48,010,148,783

So a .25% tax on NASDAQ trades (http://www.nasdaqtrader.com/Trader.aspx?id=DailyMarketSummary) would yield $120,000,000 a day or about $250 Trillion over 10 years (the typical period used by the OMB for tax calculations). A tidy sum, eh?

And that's just the NASDAQ! Hey, I think I just solved the nation's debt problem.

Remember, that's just a quarter of a percent. For comparison, typical sales taxes for us schlubs in the retail market is 8-9%. Why should we pay so much and stock traders nothing?

[timhau]

If I have a five-dollar bill and I spend it on milk I don't get taxed, but if I buy cigarettes I do get taxed. Wouldn't this be arbitrary taxation, too?

(Not lipping off to you, I really don't know.)

I don't know either. I suppose one could make an argument that you can divide consumer products into essentials and non-essentials; milk, bread, and cheese are essentials, while cigarettes, chewing gum, or beer are not. Of course, that division runs into trouble very quickly -- clothes are essentials, but extending the essential status from your basic inexpensive everyday wear to designer clothes doesn't make much sense. Cars (and by extension, gas) could be counted as essentials in Overyonder, Nebraska but hardly on Manhattan.

However, I'm not sure your example is analogous to the tax-per-share proposal. Milk and cigarettes are different things, whereas Citigroup and Berkshire shares are two varieties of the same thing; taxing transactions of Citigroup shares 30000 more than transactions on Berkshire A shares is more akin to inventing a sneaker tax and deciding that Nikes are taxed $ .01 per shoe but for Adidases you have to pay four bucks a pair. It's unlikely to deter the person dead set on buying Adidases and make him/her buy something else, but it makes very little sense.

[timhau]

Remember, that's just a quarter of a percent. For comparison, typical sales taxes for us schlubs in the retail market is 8-9%. Why should we pay so much and stock traders nothing?

Um... because Wall Street has quite a bit of lobbying power?

[ThermionicScott]

Remember, that's just a quarter of a percent. For comparison, typical sales taxes for us schlubs in the retail market is 8-9%. Why should we pay so much and stock traders nothing?

In the long run, the government stands to get more $$$ from the stocks you own, rather than that cheeseburger or pair of shoes.

- Scott

[Lothian]

It's the worst time of the year for Wisconsin Public Radio. Every day the usual schedule is eaten up with candidates for various public offices jabbering about how they're going to fix Wisconsin's various problems. These people are all idiots, and I have come to grips with this, but today, a caller brought up an interesting idea. He thinks the government (he was talking about the feds, not the Wisconsin state government) could raise a whole bunch of money by taxing each stock market transaction at the rate of one cent per share traded. At first, I formed a mental picture of guys in New York shuttling back and forth with huge bags of pennies, but the more I thought about it, the more it seemed like a suspiciously simple and yet workable idea. Anything that seems this simple is usually full of pitfalls that my simple mind either can not or will not see.

I don't know anything about the stock market, or economics or anything to do with money, other than I should be saving more and spending less. So, tell me why this idea wouldn't work.

My potential reasons why it wouldn't work:

1: The logistics of collecting one cent per trade in a market where there are zillions of trades per day.
2: Deciding who pays the tax, the seller or the buyer. I believe this could be a sticking point, as stupid as it sounds.
3: The effect on large volume trades. Would it be enough of a cost increase to keep people or firms from dealing a whole butt load of stocks at once?

Help me out, smart economics guys and gals. It can't be this simple, can it?

Oh, sure. But something in the neighborhood of half a percentage point (which is what I believe the UK Stamp Duty is) is small enough to be irrelevant for the buy-and-hold investor who buys stocks directly or puts his/her money into index funds or passive ETFs.

This (http://www.hmrc.gov.uk/stats/tax_receipts/tax-receipts-and-taxpayers.pdf) shows that stamp taxes are around 0.5% of the UK tax departments revenue which in turn is around half of all revenue.

Stamp taxes in the UK cover shares but also certain property transactions. So I guess that the 0.5% tax gives around 0.1% of UK income.

0.1% or 0.2% of the US income would be a lot of dollars but it wouldn't solve all your problems.

[SezMe]

Um... because Wall Street has quite a bit of lobbying power?
No doubt.

[SezMe]

In the long run, the government stands to get more $$$ from the stocks you own, rather than that cheeseburger or pair of shoes.
Ya lost me. Please explain.

[ThermionicScott]

Ya lost me. Please explain.

Taxes on capital gains and dividends. That is, unless you're a really small-time investor.

- Scott

[drkitten]

Ya lost me. Please explain.

In more detail,.... stocks tend to return about 10% over the long run, between dividends (which are taxed as income) and growth (which is taxed when you sell the stock, either as income or as "long term capital gains," which is slightly less).

Think about the tax rate you pay. (And think about the tax rate the owner of the average share of stock pays, which is probably more than you do -- the top 10% owning 50% of the wealth or whatever it is.)

A $200 stock certificate will return about $20/year, which will be taxed at,.... 20%(-ish), yielding about $4/year forever. The $200 pair of shoes will be taxed once at 10%, yielding $20 and last six years or so. If you hold your stock for six years, you pay more in taxes on the stock than on the shoes.

Of course, there are tax dodges and games I can play with both the shoes and the stock; if I wait until I need to go to Oregon and then buy my shoes, I can avoid sales tax altogether; if I buy stocks through an IRA I avoid paying taxes on them until I retire. But the principle remains -- while stocks aren't taxed, the income they generate is, and that income will typically be a lot more than you'd get from a sales tax on the stocks themselves.

[drkitten]

I don't know either. I suppose one could make an argument that you can divide consumer products into essentials and non-essentials; milk, bread, and cheese are essentials, while cigarettes, chewing gum, or beer are not. Of course, that division runs into trouble very quickly -- clothes are essentials, but extending the essential status from your basic inexpensive everyday wear to designer clothes doesn't make much sense.

Actually, it does make sense. It's easier and simpler just to say that "clothes" are essential than to try to decide what type of clothes are and aren't actually essential. (Some jurisdictions have tried to do that -- for example, I think in the UK that "books" are exempt from tax, but "games" aren't. So what do you do with a game that is a book, like the most recent edition of D&D? The end result is a mess, and inevitably ends up in an ugly court fight, so most governments try to draw simple, bright lines. "Clothes" is a simple, bright line. "Milk" is so-so, but "unflavored milk" is, even if it leaves the producers of chocolate milk out in the cold.)

Cars (and by extension, gas) could be counted as essentials in Overyonder, Nebraska but hardly on Manhattan.

Which is why states have their own individual lists of what is and isn't essential.


However, I'm not sure your example is analogous to the tax-per-share proposal. Milk and cigarettes are different things, whereas Citigroup and Berkshire shares are two varieties of the same thing; taxing transactions of Citigroup shares 30000 more than transactions on Berkshire A shares is more akin to inventing a sneaker tax and deciding that Nikes are taxed $ .01 per shoe but for Adidases you have to pay four bucks a pair.

It's worse than that, since Citi's share price is entirely under its control. It can adjust its share price at will simply by doing a split (or reverse split, more likely). Voila! I no longer own 200 shares of City at $3/share. I now own 20 shares at $30/share.