The Aleph Blog » Blog Archive » Trash the Transfer Tax!

Trash the Transfer Tax!

Okay, after the alliterative headline, I would like you to consider two links.

After reading the bill, I note that it is mute on whether we can add the tax to our cost basis, and deduct it from the proceeds on our sales.  If we can do that, then this bill is an annoyance, like the SEC fee, but it only changes the timing of taxation, not the amount.  Washington gets more now, and less later, natch.  That’s the way Washington always works — milk the present to starve the future.

But, lest this be a mute point ;) (some humor here because I have heard people say mute in place of moot.  My comment has been, “Yeah, I don’t hear that either.”), it does front taxation to a far higher degree from tax deferred accounts, which will pinch retirees.

Now, if this tax doesn’t figure into the basis, we have real problems. While 1/4% on each side won’t affect long term stock investors like me much, it will affect the following:

  • All arbitrage transactions.
  • Traders that profit off of small deviations in market pricing.
  • Bond managers, because they are playing for less.  1/4% in, 1/4% out makes a big difference in returns on bonds.  Bye, bye, liquidity.
  • Banks, pension funds, and insurers, because they own bonds (and stocks).
  • There will be yet more pressure for companies to “go dark” or go private.
  • Exchanges will suffer from reduced volumes.
  • Derivatives might flourish if they are not covered by the eventual regulations.  Why trade the taxable asset, when you can trade the non-taxable derivative?
  • And more… in 1966, when the transfer tax ended, derivatives didn’t exist.  Derivatives exist as a function of contract law.  Society limits the right to contract in order to reduce crime, but away from that typically there is freedom.  There would have to be a significant revision to contract law to make this effective.

I can’t think of all of the ramifications that would happen from this, given the relative complexity of our financial markets today.  Far better that we should get true tax reform, where the clever rich who have hidden their assets from taxation so long, like Mr. Buffett, should pay their fair share.  Washington, you want real tax reform?  Tax us all on the increase in net worth, and listen to the wealthy scream.  They have gamed the system for too long.

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5 Responses to Trash the Transfer Tax!

  1. KevinMorrow says:

    Just curious, but would the passage of such legislation move the bond markets out of the US to avoid the taxation? Thus creating more liquidity outside the US. And if so, how would that impact the Treasury market? Would the tax apply to Treasury trades as well? If so, yikes!

  2. Kieran says:

    With the number of worldwide exchanges and ability of money to flow easily from one to the next, this would be a disastrous law to pass.

  3. matt says:

    One of the reasons the U.S. capital markets haven’t taken as much of a beating as the ROTW (rest of the world) is because of their liquidity. In crisis times, liquidity is just one more safety buffer.

    Laws like this do a lot of bad things, but exporting liquidity to other capital markets with the capacity to handle it is a major result.

    Additionally, this will make markets less efficient because there will be a larger arbitrage barrier.

    Finally, more volatility. yup.

  4. polit2k says:

    I’ve yet to hear a good logical argument against this proposed tax except it’s billing as “Let Wall Street Pay for Wall Street’s Bailout Act of 2009″ which is a stupid way of selling the concept.

    Governments ww need tax revenues and they’ll get them wherever they can. This looks like an easy sell and very cheap to collect and don’t assume it won’t end up much higher than 0.25%.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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