A Sales Tax on Stock Market Trades Can Balance the Budget
You buy a pair of shoes. In most states if the price is $50 you pay about $55 to buy them. The extra amount is sales tax. Sales taxes range from 7% to over 10% in most communities. To buy a car in Cook County, Illinois you pay $11,500 if its price is $10,000. The extra $1,500 is a sales tax collected by government. In Santa Cruz, CA for a MacDonald’s hamburger listed as 89¢ you pay 97¢. There is a 9% tax.
But if you buy 10 shares of Wal-Mart stock at $56 per share you pay $560. Nothing at all is taken by government! There is no sales tax on buying stocks or bonds. Too bad you can’t wear or eat stock.
Now here is the remarkable fact: If there were a 9% U.S. Government sales tax on the sale of securities (stocks or bonds) the amount of revenue collected would entirely wipe out the Federal Deficit and even leave some surplus!
Here’s the arithmetic: The web site of the New York Stock Exchange (nyse.com) lists the value of securities traded each day. Extrapolating for a 250 day year of trading yields an amount of about $18 trillion in stock sales per year. The US Government Budget, Summary, Table S-1 (www.gpoaccess.gov/usbudget) says the deficit for the year 2010 was $1.6 trillion.
So a 9% tax on security sales (otherwise known as stock trades) would completely eliminate the deficit!
(9% × $18 trillion > $1.6 trillion)
When a ‘sales’ tax is imposed by the federal government it goes by the name excise tax rather than sales tax. The euphemism ‘security trade’ actually means ‘sale’. Somebody sells a stock or bond to somebody else who buys it. And, unless it’s a rare initial public offering (IPO), the sale has no effect whatever on the coffers of the company being ‘traded’. It’s just an exchange of ownership. The ten shares of Wal-Mart stock that the seller sells to you means that he relinquishes his ownership stake to you. Now you, instead of the seller, own one 400 millionth of the company – 10 shares worth. It’s like buying a used car from someone. He owned it before. You own it afterward. No money goes to the manufacturer. But you must pay a tax on the car ‘trade’! The stock trade is tax free.
There’s an important economic difference between taxing the sale of consumer goods and taxing the sale of securities. Taxing consumer goods hurts prosperity. Taxing stock sales doesn’t. Making, transporting and selling consumer goods employs people. Trade in goods and services adds to general prosperity. It keeps people working and gives them purchasing power. So a sales tax on consumer goods hurts prosperity. Every fiscal conservative knows this.
But a sales tax on stock market speculation – the buying and selling of stocks – doesn’t directly affect general prosperity. Stock trades are exchanges of ownership. Exchanges of ownership don’t create jobs. Consumer goods are not affected. So our tax system encourages speculation and discourages the prosperity of job seekers.
Things not taxed cost less. Low taxes encourage commerce. The tax system makes the commerce of stock market sales easier and the commerce in manufactured goods harder. But the manufacture of goods employs people. It contributes to prosperity. So prosperity is handicapped with taxes. While speculation is encouraged by being tax free.
Perhaps its time to discourage stock market speculation and to tax it.
For those who may want to bring this idea to their representatives in Congress and in the Senate take note that, using your zip code, you may look up your representative and senators at: