Small Traders Fear Transaction Tax Would Wipe Them Out

The fight over a financial transaction tax is heating up. Rep. Peter DeFazio, D-Ore., on Thursday introduced legislation that would apply a "small" tax on trading in stocks, bonds and other securities. Iowa Democrat Tom Harkin plans to introduce a similar measure in the Senate next week.

The DeFazio bill would levy a 0.25 percent tax on stock transactions, with refunds given for transactions of less than $100,000. A .02 percent rate on trading in futures, options and credit default swaps (as well as other kinds of swaps) also would be applied. Said the lawmaker in a statement:

"The American taxpayers bailed out Wall Street during a crisis brought on by reckless speculation in the financial markets. This legislation will force Wall Street to do their part and put people displaced by that crisis back to work."

More than 200 economists issued an open letter this week supporting a financial transaction tax. They contend that a modest tax would only raise trading costs back to levels common in the 1980s and '90s and would have limited impact on trades with "real economic value."

Yet some smaller investors are up in arms over the prospects of a transaction tax. Michael Perlich, an independent trader in Miami who specializes in gold and silver contracts, as well as equities, said in an interview that such a tax would put investors like him out of business "overnight."

"This would completely wipe out the trading community," he said, noting that it would hit small brokerages especially hard. "The public seems to lump small traders in with the traders on Wall Street, and that's simply not the case."

Tom O'Brien, CEO of investor advisory firm TFNN Corp. and a frequent commentator on financial transaction taxes, flatly rejects the idea that a tax wouldn't hurt smaller investors and traders. A 0.25 percent tax on stock trading imposes unacceptably high costs on traders, most of whom do $500,000 to $1 million worth of business per day, he said in an interview.

More broadly, O'Brien defends the rights of speculators, while dismissing the notion that securities trading contributed to the financial crisis. "What right right does Congress have to put a tax on something that you don't even know if you're going to make money on?" he said. "This isn't a tax on whether I make money -- it's a tax on transactions."

Instead, lawmakers should shine a light on the opaque derivatives market, which was a direct cause of the speculative bubbles that led to the financial crisis, O'Brien said. He also favors reviving the Glass-Steagall Act or otherwise separating commercial and investment banking.

Several transaction tax proposals have made the rounds on Capitol Hill. Besides the DeFazio measure, Rep. John Larson, D.-Conn., has introduced a bill that would tax over-the-counter futures, swaps and other derivatives. Colorado Democrat Ed Perlmutter has expressed support for a plan championed by the AFL-CIO that would levy a tax on all equity transactions. And DeFazio has also proposed taxing oil futures contracts.

What both sides want to know, of course, is will any of these ideas pass muster in Congress. A source I spoke with in Washington put the chances at less than 20 percent, adding that "the votes just aren't there" in the Senate.

One major roadblock is likely to be lawmakers from New York, including House Ways and Means Committee Chairman Charles Wrangel and Senate Banking Committee member Charles Schumer. Clearly, their financial industry constituents oppose a tax. Treasury chief Tim Geithner also has come out against it, suggesting that the White House is cool to the idea.

Indeed, for lawmakers it's often more beneficial to propose legislation with little chance of passage than a bill that could actually make it into law.