The Trade Tax, Fear Index, and Obama’s Common Man
The latest proposal on the table from President-elect Obama’s advisers is taxing market trades. This is a spectacularly bad idea.
In a recent article in The New York Times, op-ed columnist Bob Herbert laid out the reasons behind the recently proposed tax on “the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately.”
The idea of taxing the more exotic financial instruments is a good one. Ezra Klein makes the point that taxes discourage activity and discouraging the use of bad financial instruments is definitely a good idea. However, taxing traditional and trusted trading elements of the market, trades of stocks, bonds and the like, is a very unwise proposition.
In case you haven’t noticed, fear on Wall Street means just as much, if not more, as the reality of the market. If you have any 
doubt of that, just take a look at the Chicago Board Options Exchange Volubility Index, or as it is more commonly known, the Fear Index. Investors’ worries control the market. That’s why a quick comparison will show an obvious inverse relationship between the standard market indexes and fear index.
The claim is that this tax will not change the behavior of regular investors and earn sorely needed money to counter our increasing national deficit. Mark Cuban went so far as to say that the tax would act as a protection for investors who “get pitched unregulated penny stocks.”
This is pure foolishness and misses two essential points. First, stupid investors will continue to be stupid no matter what. Second, that any discouragement, even a slight one, will have a large effect on the market. That’s what the previously mentioned fear index is all about.
A tax on stock trading, no matter how minor, won’t affect the behavior of the people who got us into this mess, they make enough money to keep on doing what they are doing. What it will change is the behavior of casual investors, who — no matter how minor the tax on their trades might be — will be discouraged from investing in the market, US companies and our economy. These small fish who help keep our economy going will pull out of the market or decrease their trades in fear of what a tax will do to them and their investments.
Worse of all, this sort of discouragement is no help to the failing middle class that Obama promised to save. The tax would increase the barriers to investment; this measure would impact the ability (or at least the perception of the ability, which is just as bad) of the regular American to invest and grow their capital.
By cutting into the relatively small profit margins of long-term investors and casual traders, and discouraging them from investing in the market, a tax on trades would be bad news for an Obama administration that promised to protect the little guy.
