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.