Traders Tax there again

Last week I posted the portion of the Revenue Act of 1932 which has to do with stock trades. I understand why no one commented directly, as it's a complicated beast. It suggests the market environment was different, most probably with a greater preponderance of stocks bearing par value and face value than in the current century.

The (Section 723) Stamp Tax of 1932 had several rates which applied differently if the stock had par/face value or if it was stock with no par value. In promoting his current legislation, Congressman Peter DeFazio talks about a rate of 4 tenths of one percent as if it were a blanket rate, applied to all transactions. After careful reading of the 1932 text, my understanding is that particular rate would apply only to stocks with no par value which were selling at a market price of exactly ten dollars. No other equities would be taxed at this specific rate. That is a very very small portion in a universe of stocks. Unless there is some heretofore unknown congressional action of 1932 lurking in the shadows, this would seem to make Representative DeFazio's statements pushing his current-day tax proposal untrue; essentially, it would be false advertising. And that's one reason why I wanted you to see the actual text.

Coupled with this is Congressman DeFazio's smearing of the trading community. In the two interviews I've seen, he fails to recognize the contributions to market liquidity of frequent traders, calling them "gamblers" and "churners." I know there are gamblers among us, but I think they tend to flame-out. Painting all traders with that brush seems malicious. Churning carries a particularly loathsome connotation; it's what unscrupulous brokers do to generate commissions from client accounts. Semantically, "churn" is a negatively-charged word, and using it as a synonym for frequent trading is unconscionable.

Would you buy a car from Congressman DeFazio? Suppose he offered to sign you up for a subprime mortgage; would you trust the motives behind his offer? And what if he worked at one of the rating agencies that gave a pass to the bundled CMOs and CDOs (the ones which morphed and spawned into toxic assets); would you trust his grades on the securities?

My answers are, "No, No, and No!" I hope you agree.

Alton 4-04-09

PS - And now. just for fun

Thanks for all your efforts Alton. So that you know, I've read all your posts, and appreciate them. This guy DeFazio is a crook in my opinion. Of oourse, he's not the only one. I hope we can marshall the support to defeat this if it moves any further. IT

Alton, I too appreciate your efforts. This is important and you're doing good foundational work. Mark

After careful reading of the 1932 text, my understanding is that particular rate would apply only to stocks with no par value which were selling at a market price of exactly ten dollars. No other equities would be taxed at this specific rate. That is a very very small portion in a universe of stocks.

Thanks for that perspective Alton. I hadn't studied it that close. That is very interesting for two reasons.

1. I had assumed that if the tax were re-enacted the result would be similar to '32. A bottom of lasting proportions. Now I know if the tax is re-enacted and placed on all trading activity then the result could be and probably would be very different than the result in '32. Good job Alton.

2. Duhfazio is speaking way beyond his intelligence. We all suspected that anyway.

Even if Duhfazio was well read in his market history, his malicious treatment of people and their profession shows his lack of deapth and lack of wisdom.

thanks Alton,

zz

p.s. maybe i should cut duhfazio some slack. he probably has an inferiority complex being a politician and all. no. nevermind. i take that back. NO slack for that slacker.

do you really think that the “Moron from Oregon” thunk this up all by his dumb self? Someone is lining his pockets, I wonder who? Please think on it Broad-based collusion........... monk

Someone is lining his pockets, I wonder who?

Please think on it

Broad-based collusion...........



monk

Collusion! An interesting thought. But who would be the power behind it? Is Sidious still active? Perhaps it's the newcomer, Darth Anathule. I hear he has changed avatars to avoid being recognized as a Sith.
....

Edited by Alton, 14 April 2009 - 12:22 AM.

Thanks always for encouraging words. It will be even more rewarding if each of you will take at least one action to fight the transaction tax each week. Here's a Traders-Talk post from nearly two months ago. It was written by IndexTrader. This is the message which energized me.

This proposal of a .25% transaction tax will bring about the end of active trading. Here's why: if you buy $50,000 in securities this will create a transaction tax of $125. When you sell it that will create another transaction tax of $125. A total of $250. Plus commission. Let's say you do this 250 times per year. Your total transaction tax is $62,500. This means that if you were using no leverage at all, you would need to profit over 100% in the course of the year in order to pay your transaction tax.

By the way, this also covers futures. Which means that if you trade 1 ES each day for a year, your transaction tax would total $62,500 approximately.

I don't know many folks who can pay that type of friction, along with commission, and still stay in business.

This bill would not only end the career of active traders. Because of this, it would also reduce liquidity (fewer traders), and therefore increase volatility. This means spreads between bid and ask would then rise. So the remaining investors would then not only pay the transaction tax, they would pay addition execution costs via the increased spread.

But lets go further: companies like Ameritrade, Interactive Brokers, etc tc etc, would no longer be able to offer their low commissions because their volume would decline precipitously. Thus, commission increase. My guess is that some of these online brokers would go out of business.

And finally, the support services that currently service the active trader community, like charting software, front end execution software, and so forth, would all see a major decline in customers, and in all likelihood would either go out of business or have to sharply increase prices. My guess is the latter.

This proposal could literally be a disaster to the markets. My suggestion is to contact your Congressman, contact members of the house ways and means committee where this bill will be taken up, and give them your views.

IT

When I first read IT's post, I looked mostly at how the math worked in multiplying a "de minimis" tax into an intolerable burden. When I reviewed the post recently I found much more detail and insight than I had remembered. Read it carefully. There are many issues which affect all of us.

I understand that IndexTrader will appreciate having his message passed around if it can help fight the transaction tax. He doesn't require recognition or credit...just to stop the tax. Send it out everyway you can. This is something you can put on your to-do list.

Alton 4-14-09

This weekend from Don Miller's blog :

Trader Tax Legislation Feedback - Many thanks to one of our readers for forwarding me a response from Barney Frank to his letter opposing crazy-man Defazio's tax idea. Included in Mr. Frank's response was, "As Chairman of the Financial Services Committee and one who is aware of which banking-related bills have the likelihood of becoming law, I can tell you that I see no chance of this legislation passing the House."

http://donmillerjournal.blogspot.com/

The quote from Barney Frank's e-mail about the Transaction Tax legislation (posted by tommyt) is especially welcome since the congressman is considered to be well to the left in his party. Let's exercise some restraint in celebrating, though. Is he talking about HR 1068 only? It was the focus of most of the early letter-writing and other protest. So what about the portion of HR 676 which authorizes the tax, or some other incarnation of the same legislation?

Sheeze. This is going to be a long fight.

It would be nice to declare a victory, and perhaps we've won a battle. If the "Trader Tax" is indeed dormant, let's be thankful. But continue to be watchful, and keep the inequities in mind.

Remember:

• unfair focus of the tax on traders who were not responsible for the crisis.
• every instance where false statements were used to promote the tax.
• the regressive and punitive nature of the tax on small traders.
• the illiquidity and increased volatility which would result in the market.
• that the transaction basis of the tax promotes a greater level of risk-taking.
• the widening of spreads which will be necessary because of the tax.
• the many traders who will have had their livelihoods destroyed.

This list is a brief compilation from many different posts on Traders-Talk.

Be prepared for a re-emergence of the proposal for a Transaction Tax; I think it will happen. A bill tabled in 2009 may reappear in 2011. We all know the current spending will eventually have to be paid for, and someone will try to make traders pay more than a fair share. You have a duty to yourself to assure you are not the scapegoat in the final accounting.

I've said about all I can think to say (and usually more than once) so I won't be as persistent in my posting. I'll watch for news, and add a comment if it seems needed, but my periodic "pep-talks" have to cease. For now, I'm going back to learning my craft. I'm not an especially good trader, but I'm improving. Best of luck to all of us.

Alton 4-26-09

PS – If you get the urge to thank someone, thank yourself... for rationality, integrity, productiveness, and pride.

Obama tried to slip in a 5 cent fee on futures and options on futures in his 2010 budget to pay for the CFTC.

http://www.chicagobu...w...78&seenIt=1