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:
http://www.govtrack.us/congress/findyourreps.xpd
Happy hunting.
Comments
16 responses to “Tax Stock Trades”
Would this tax discourage securities investment in the same way that large businesses sometimes move to regions with cheaper tax and labor costs?
Good point, Zeb, and I’m sure a valid one. It would certainly discourage securities speculation because each trade would cost more. There would be less trading. But securities investment would certainly continue. Available capital demands investment.
Insofar as companies not listing themselves on the New York Stock Exchange a new equilibrium would be reached where the advantages of operating in the U.S. would be balanced against the disadvantages of a tax there. Taxing cigarettes or gasoline does not drive those enterprises into extinction. It merely reduces their potency. Also one may choose to tax only the secondary market so intitial public offerings, which raise capital for companies, remain tax free. Any policy change results in some who lose – in this case brokerage houses, speculators, investment banks, hedge fund managers – and some who gain – in this case the general public.
In short, I’m sure that you’re right that the policy of taxing stock trades will tend to drive trading elsewhere. But to what extent is something to be seen. It will certainly not kill the U.S. stock market because people will want to invest in U.S. markets where they feel safe. Many will want their mutual funds to stay in U.S. markets as they do so require now.
Tell your web guy to add a share button so people can post this to facebook, twitter, etc. so this thing can go viral. Also have him or her make sure that the link has an interesting picture because the way it is set up now isn’t attractive when you link it. BRILLIANT idea by the way!
Its worthy of more discussion. Money would flo to exchanges without the tax in the short term. But it seems like in the long term all exchanges would adapt some kind of tax. Without the tax, governments are subsidizing the wealthy. With the tax it would slow down the speculative element of the market that again benefits only the wealthy.
my own opinion is that this idea is interesting but I see some huge problems in implementation. For one thing how would one stop people from doing their trading abroad? Another difficult question might be would people actually trade freely if there was a 10 percent penalty for doing so? I do not know the answer to that. The article analogizes to trading second hand cars but that may not be on all fours.
On the other hand I think philosophically – disregarding for the moment what effect it might have on the market – I think this is a good place to exact a tax. The benefits from wiping out the deficit might or might not make up for the disruption of trading. I do not know what a cost/benefit analysis of this idea would show.
(beguinning of remakrd wiped out for some reason) Walter
At first thought I loved this idea and I think it should be debated.
Politically it would be a hard fight to battle, since the rebut would be either:
* “Your pensions/401s would get affected” – because most 401s and other retirement products use a percentage on high-risk high-return investments to get your investment going.
* “Don’t double tax my retirement plan” – since exchange returns are already taxed.
Both arguments have great counter points but in this political environment it’s hard to have a debate last past the first argument.
Thanks for sharing.
Pretty interesting idea.
I think the reason it would work so well is probably that the market at this point is so dominated by programmed high-frequency trading. Given that the objective of each of those trades is to scalp extremely small amounts, I suspect the stock tax wouldn’t end up achieving its objective because it would ultimately make that activity less profitable and thus we would see a dramatic decrease in # of trades. But that would be a good thing in itself–maybe then our best and brightest would apply their talents to something more productive.
A stock trader wrote:
“That’s one of the dumbest ideas I have ever heard. Think about it. You are going to invest 100 in a stock in hopes that it goes up to 105. But you now have to pay 9 to buy. So you really only bought 91 worth of stock but you spent 100. Now it has to go up 10% just to break even. So no one would buy stocks in the US. We would either not buy stocks at all or buy them in Canada, Japan, London or Germany. Absurd.”
We can deduce from this vituperation that the proposed tax-on-trading scheme can be self-defeating. The tax might drive away the source of revenue being taxed.
Practical question: Can Wal-Mart stock – registered with the NYSE – be traded on other stock markets? I would guess that you can buy and sell Wal-Mart stock on the TSE (Tokyo Stock Exchange) without going through the New York Stock Exchange. Is this true? It’s certainly the implication of the self-defeating argument. Of course, if stocks must be traded through their registered exchange then trading could not easily be driven abroad. After all, to register ownership it seems necessary to go through the registered exchange! So I would like to know how easy it would be to drive trading abroad.
This is a very complicated tax policy issue. Some countries (Germany) have had but abolished or still have (Switzerland) a small tax on stock exchange transactions. It may be instructive to look at how these taxes worked in
practice and why they were abolished.
Although the basic idea of taxing areas of the economy with low (or in the case
of many Wall St. functions) negative productivity is a good one, the article makes some simplyfying assumptions that in my view are highly unrealistic.
First, the abosolute majority of stock exchange trades in the U.S. are program
trading, i.e. computer generated trades by parties who normally have an arbitrage function or a model that works that way. ALL of those parties would be out of the market for obvious reasons if the tax suggested by the article would be adopted, since day trading would clearly become highly unprofitable no matter how the market moved.
The tax would, as you point out, tend to favor investment on foreign exchanges, but the U.S. often tries to impose extraterritorial taxes and might do so in this case.
Another effect would be to increase the cost of capital for public offerings and sharply turn around the trend towards disintermediation, i.e. commercial banking would benefit. Large inefficiencies would be created by essentially kicking out market makers and arbs. The liquidity of many stocks would dry up and going private transactions would become much more attractive. Depressing liquidity and stock prices would be particularly bad for large pension funds which need high liquidity in order to trade and the rate of pension underfunding would increase.
Unclear is what would happen in the bond market. If bonds were taxed at the level suggeted by the article, there would be (virtually) no corporate bond market in the U.S. Who would buy a typical AAA rated 5 year bond bearing a coupon of 2% if due to a transactions tax there was no way to get back the original purchase price even if interest would be taken into account. However, bonds of lower rated companies tend to move with the stock, as do convertible debentures. So if they were not included, equity investors might just switch to hybrid products.
All of the above would both decrease revenue from the tax and cause significant dislocations in the economy.
So I query if that is the best way to tax the unproductive sectors of the economy?
The complaints against this tax are primarily based on the size of the tax. Let’s lower that to 1% and still realize more than $300b a year. If I have a million to invest I shouldn’t mind paying 10,000 in a tax. I’m a small investor and I wouldn’t mind. I remember the days when broker commissions were considerably more than 1% and that didn’t stop investing. It’s a great idea and I support it 100%
Another thing to consider is the ease that this tax could be collected. No where in this country is financial transactions more closely accounted for than in the stock/bond markets. Let’s do it.
Why do we have to pay on sale of real estate and not on securities. Is this fair or discrimination?
You assert that speculation should be taxed. Do you have have an analysis how speculative markets work? You need one to back up your proposal. In general speculation is constructive if markets are not biased by various kinds of interventions. A tax of the kind you propose would cause great damage to financial markets. I cannot develop a theory of speculative markets here but there is literature available.
Hello hey I have thought the same thing! You have a lot of good points but how would the government get the money? Would you need workers to go to the brokers or company. How will the government get this money instead of the brokers pocketing it
I expect the tax would be collected and reported by the brokerage house executing the sale. Like the retailer must report and pay taxes on all sales subject to the penalties of the law. Or it might be collected as part of income tax where all trades would be reported instead of only those on which a capital gain or loss is reported.
I thought I had a genius idea last night when I asked why there wasn’t a sales tax on the sale of stocks. Even if I wasn’t the first to conceive the idea I would like to ask why we don’t push this idea. stocks are goods just as much as shoes and even a tax of 1% or .1% would generate a huge amount of revenue for the government. Don’t the owners of stock benefit from a financially sound government? Aren’t the owners of stocks better able to contribute to the nation’s welfare than poor mothers and fathers buying shoes for their kids? Let’s speak up and push this idea.