Stamp Tax on Securities and Commodities Transactions - A Very Bad Tax Proposal
February 24, 2009
By Daniel G. Viola and Roger D. Lorence
Several members of Congress, led by Rep. Peter DeFazio (D-OR) have introduced the "Let Wall Street Pay for Wall Street's Bailout Act of 2009" (H.R. 1068). This bill would collect a 0.25% (one-quarter of one percent) excise tax ("stamp tax") on the gross proceeds of all securities and commodities transactions on U.S. markets. The tax would be collected on covered transactions taking place more than thirty days after enactment - collection would be by the exchange on which the trade is carried out. The bill refers to "sales occurring" in that time period but the bill would collect the tax on both purchases and sales.
The clear intent of the bill's sponsors is to enact revenge on "Wall Street" as well to raise an estimated $150 billion of tax a year. The tax is projected to be phased out and eventually repealed "when the cost of the bailouts are repaid." The bill claims that a securities tax would have "a negligible impact on the average investor." It has been proposed that the stamp tax be used to pay for part of the health care reform legislation that is working its way through Congress.
The securities/commodities transaction tax is a Twenty-First Century type of stamp tax - a hated type of tax levied on documentary transactions which led to the American Revolution. This new stamp tax would fall very heavily on active traders, as shown in the following example.
EXAMPLE. DVRL, LLC is a two-member firm that actively trades in securities and commodities. In 2010 its partners' capital is $200,000, and purchases $10,000,000 of securities and commodities and sells $10,000,000 and has net profits before the stamp tax of $40,000, a 20% return on partners' capital. The stamp tax of $50,000 (0.25 x $20,000,000) results in a taxable loss of $10,000 for the year.
Stamp taxes have had a very controversial history in today's markets. In China, the stamp tax caused massive unrest because it was seen as being paid by "the little guy." In the United Kingdom, where the stamp tax is a whopping 0.50 percent, the creative ways invented to avoid paying the stamp tax are legendary among tax practitioners. Under our law, the stamp tax, because it is not a federal income tax but a type of excise tax, is not a credit against federal income taxes, but only a deduction (saving at most thirty-five cents on the dollar against federal income tax).
Although the stamp tax bill was not sponsored by members of the Congressional committees engaged in writing tax laws, it must be taken very seriously. If enacted, it is certain to have very damaging effects on U.S. securities and commodities markets, by harming the active traders on whom these markets depend for transaction volume and liquidity. Further, it is alarming that a few publicity seeking members of Congress who know so little about the financial markets apparently do not care about the damage their actions would engender. The bill, of course, completely misses the point that the stamp tax will be collected by Wall Street (that is, the exchanges) but paid by Main Street - the customer.
We will, of course, keep you posted on developments. If the stamp tax turns up in legislation before the House Ways & Means Committee or the Senate Finance Committee, that will be major news. Active traders can voice opposition by signing the petition at this link: http://www.rallycongress.com/no2tradertax/1536/
If you have any questions concerning this Tax Alert or any related matters, please contact Daniel G. Viola, 212-573-8038 (firstname.lastname@example.org) or Roger D. Lorence, 212-573-8413 (email@example.com). We welcome your input.
U.S. Treasury Circular 230 Notice: Any U.S. federal tax advice included in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal tax penalties.
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