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The Hundred Billion Dollar Tax On Investors

quinn_anya@Flickr

quinn_anya@Flickr

According to the Wall Street Journal, the government is considering a tax on financial transactions that could raise $100 billion for the government coffers.

This week, the left-leaning Economic Policy Institute floated the idea of a national transaction tax that would raise $100 billion to $150 billion a year. The tax, at a rate of 0.1% to 0.25% of the value of the trade, would be levied on all financial transactions such as stock trades, but not on consumer transactions such as with credit cards.

This will include a tax on your stock purchases. And your stock sales. (In addition to capital gains tax.)

Using a little math, that would mean that there’s $100 trillion in transactions each year. It sounds like another cash cow for the bureaucratic milking. Who will miss a couple hundred billion here or there?

But, as with most things, the law of unintended consequences rules and the question remains, what effect will this have on investors?

Inefficient Allocation

At best, the money raised through this tax will be an inefficient allocation of money. While it will be spun as a way to take money from greedy CEOs, this money will also be drained from retirement funds and rainy day accounts and placed in politically-connected bailout programs and $300 toilet seats for the Pentagon.

Investors Are Already Taxed

Investors are already burdened by income taxes and capital gains taxes. Transaction costs that eat into returns are one reason why investors, especially individual investors, decide the risks of investing outweigh the potential for returns. With this financial transaction tax added to those levies, more investors will drop out and, instead of funding research, innovation, and product development, their money will languish.

Overseas and Underground

Smart investors and financial companies will simply avoid the tax by trading on overseas accounts. This could be the final straw on the teetering financial industry’s camel.

Why Now?

Those are some possible unintended consequences. But are they unintended at all?

It seems like the government specifically wants to hurt investors. Note that there’s no intention to add a transaction fee on credit card transaction, even though investing is a better financial practice than using credit cards with 28 percent interest to finance unneeded purchases.

It’s better to follow what someone does, rather than what someone says. This works for the government, too. For all their extolling of individual financial responsibility, financial transaction taxes prove that the government wants you in debt and unable to manage your own finances.

A dependent populace is a controllable populace.

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  1. Patrick
    October 12th, 2009 at 05:40 | #1

    I can tell you that a lot of hedge funds are setting up everything including the locations of the people to be offshore. This kind of tax talk is nothing compared to the established tax benefits already in place and the operational risk posed by the looming spectre of capital controls and other black swans. The icing on the cake is that for a small fund there are a lot of fund-raising opportunities with high-net-worth international clients.

  2. October 12th, 2009 at 06:47 | #2

    Excellent information.
    Thanks for the comment, Patrick.

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