Tags: Economists | Taxing | Stock | Trades

Economists: Taxing Stock Trades Will Harm Main Street

Tuesday, 15 Nov 2011 08:04 AM

Economists Yakov Amihud and Haim Mendelson say the proposed tax on stock trades will hurt Main Street investors far more than shifty traders.

"Every few years, the idea of imposing a 'sin tax' on Wall Street makes a comeback, and the idea is back again in the wake of the financial crisis," Amihud and Mendelson write in The Wall Street Journal.

"Proponents of a securities-transactions tax look upon it as a way to punish sinners (securities traders), discourage their sinning (trading), and raise revenue for the U.S. Treasury."
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The economists say their research shows unambiguously that higher trading costs depress the prices of stocks and bonds. “We estimate that a 0.25 percent transaction tax on stocks will lower their average price by about 10 percent," they say.

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(Getty Images photo)
The effect will vary across stocks, being more depressive for large-cap stocks, like those in the Dow Jones Industrial Average, according to Amihud and Mendelson.

"In essence, a transactions tax on securities is tantamount to a rise in interest rates, which inhibits investment and economic growth," they say.

"This is the last thing we need."

Amihud and Mendelson say that, according to a report by Investment Technology Group, the total transaction cost on U.S. large-cap stocks averages 0.32 percent, so a 0.25 percent transaction tax will increase the transaction cost by about 80 percent.

For the average U.S. stock, with a total transaction cost averaging of 0.46 percent, the increase is almost 50 percent.

"Most bond trades have significantly lower transaction costs, so if they too are taxed, the increase in costs will have a larger negative effect on prices," the two note.

"A tax on Wall Street will hurt Main Street by reducing employment and investment, and it will increase the budget deficit at least in the short run,” they say. “The waning investors' wealth as a result of the decline in asset prices will reduce consumption and hinder economic recovery, a far cry from what tax advocates hope to achieve."

The Des Moines Register reports that proponents claim that The Wall Street Trading and Speculators Tax Act, introduced by Senator Tom Harkin and Representative Peter DeFazio, would raise $352 billion between 2013 and 2021.

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Economists Yakov Amihud and Haim Mendelson say the proposed tax on stock trades will hurt Main Street investors far more than shifty traders. Every few years, the idea of imposing a 'sin tax' on Wall Street makes a comeback, and the idea is back again in the wake of the...
Economists,Taxing,Stock,Trades
1932
2011-04-15
Tuesday, 15 Nov 2011 08:04 AM
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