Say NO to the Trader Tax!

We’re all fired up against this proposed tax at TK, and we want to do our part to mount a campaign against it.

If you haven’t read the excellent WSJ op-ed “A Transaction Tax Would Hurt All Investors” by Burton G. Malkiel and George U. Sauter, you should. If you haven’t signed this online petition Tell Congress To Block the Trader Tax, you should do that too.

The tax proposed by Sen. Tom Harkin (D., Iowa) and Rep. Peter DeFazio (D., Oregon) has gone by several titles; its most recent incarnation is called H.R. 4191: “Let Wall Street Pay for the Restoration of Main Street Act of 2009”. If passed, the bill would impose a 0.25% transaction tax on the "sale and purchase of financial instruments such as stock, options, and futures". Read the latest version of H.R. 4191 here.

It’s a misguided idea for one reason: you can’t easily separate Wall Street from Main Street anymore. The proposed tax seeks to penalize “fat cat” Wall Street firms whose risky speculations jeopardized the larger U.S. economy. We agree those market players do deserve punishment now and tighter oversight and risk management into the future.

But this penalty won’t hit its fat cat target. Instead it’ll settle on the shoulders of millions of Main Street investors who are already struggling against myriad obstacles to meet their basic financial goals.

Malkiel, a Princeton economics professor, makes the same core argument in his op-ed, so I won’t repeat that here. What I will add are my insights from running a fledgling brokerage firm with 160,000+ independent, active investors as our client base, and from my daily interactions with you guys in our Trader Network. Here’s the picture I see, one I think is utterly invisible to DeFazio, Harkin and proponents of their trader tax:

There are now approximately 20 million U.S. investors actively managing their own money to meet their financial goals. The reviled “Wall Street speculator” who will be paying this tax is, on average, an individual investor of middle income in his 50s. He faces plenty of financial obstacles already:

•    He’s paying astronomical college tuition bills in an era of shrinking student aid and skyrocketing medical bills for his whole family.

•    His aging parents may require his financial support.

•    His own retirement portfolio hasn’t budged in its net size over the last decade, even though he’s poured more savings into it. He knows for a fact Social Security won’t provide him any support, and his Medicare benefits are similarly in jeopardy.

•    Worst of all, he probably relied on a financial advisor to help him through this maze. Most of these “trusted” professionals hemorrhaged their clients’ portfolios  with poor advice and high fees. After last fall’s market crisis, many won’t even answer the phone when this “small fry” investor demands answers.

Individual investors are alone, shouldering an incredible burden for themselves and their families. If you’re already in your 50s, buy-and-hold just isn’t going to cut it as a retirement strategy. During the 2008 market crisis until today, we’ve opened TradeKing accounts for literally thousands of investors facing these terrible odds. Our clients are modern-day Horatio Algers, trying to claw their way out of this hole through smart, risk-managed active trading.

DeFazio and Harkin contend that the tax is designed not to hit individual investors like the guy described above. As they wrote in the WSJ op-ed rebuttal, “A letter from 200 economists argues that this tax would have limited impact on trades that provide real economic value. Our legislation excludes tax-deferred pension accounts, the purchase of mutual funds, and the first $100,000 in transactions annually, protecting long-term investors and the majority of Americans.”

$100,000 sounds like a big number for a smaller investor – but it’s not. If you rebalance your $200,000 portfolio annually, as nearly all personal finance experts encourage, you’d face an additional $500 in taxes for stock, options and futures holdings in a non-retirement account. This is on top of whatever capital gains and income taxes you already pay, not to mention commissions.

The bill says you’re exempt for the first $100,000 of those transactions, so you could ultimately get $250 of that $500 back. But it’s very likely you’d have to file for this exemption specifically in your taxes and wait for reimbursement. More work for you (and more billable time for your tax advisor). The proponents of this tax are counting on many people not to go to that extra trouble.  

Can’t an investing guy or gal get ahead?

DeFazio and Harkin dismiss this trading activity as having no “real economic value”. Tell that to the individual investor struggling to use his brains, skills and limited capital to meet so many financial goals on his or her own steam.

This investor is not the “Wall Street speculator” that caused all our economic troubles; those big market players will smoothly pass on their share of the Trader Tax to the little guy either as additional fees or widened bid-ask spreads, both of which cripple the little investor even more. This guy represents the “Wall Street” that dissolves into “Main Street”. He deserves our help and support, not a penalty.

We’re writing our congresspeople in Boca and Charlotte to get our voices heard, and you should do the same. Sign the petition today!

[image: no sign by TheTruthAbout… on Flickr]

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