Wall Street Bad Behavior to Make You Rich?

Bernie_Sanders_portrait_1 - Wall Street Bad Behavior

In a fascinating article this morning, The New York Times evaluates a proposal by Democratic Presidential Candidate Bernie Sanders.  The proposal essentially suggests a 0.5% fractional tax on any purchase or sale of stocks, 0.1% for bonds, and 0.005% for derivatives.  On the web site for Sander’s presidential campaign, the stated reasons for such a tax are:

  • “reduce risky and unproductive high-speed trading and other forms of Wall Street speculation; proceeds would be used to provide debt-free public college education.”
  • “Introduced a tax on Wall Street speculation to make public colleges and universities tuition-free”

It’s an interesting idea, and to be frank, as a passive, index-only investor in the accumulation phase, the notion of less volatility is appealing.  A less volatile market is one less prone to irrational mood swings, and should theoretically rise at a faster rate than at present.

Which Wall Street Bad Behavior is the Target of the Tax?

Let me take a step back.  In essence, Sanders is calling out speculative traders, and high frequency (“HFT”), or “algorithmic”, traders in particular.  The idea is that since these systems perform thousands or even millions of micro-transactions in response to minor changes in the market, and because they are known to create more volatility in the market and trigger flash crashes, that introducing a tax on each transaction would negate the incentive to perform this kind of trading, which profiting fractions of a percent at a time.

It’s important to note that Sanders is also proposing new government spending by making college free for all Americans (among a number of other programs), something which, if possible, would likely be a huge win for society in general.  The transaction tax is one of the primary vehicles to bankroll the spending involved in those social programs.

Might the Frugal be Affected?

Though the proposal purports to target Wall Street bad behavior, there is little in the way of specifics to determine whether or not I, and others who do not trade excessively, may be affected.

I do purchase several thousand dollars worth of index funds every month in both my 401(k) and taxable accounts.  If I were assessed a .5% transaction tax on that amount, it would amount to $5 per thousand dollars invested.  To be frank, I would easily shrug $5-$25 per month off, simply by finding a little more savings somewhere else.

In early retirement, I anticipate having a low enough income not to pay income taxes under the status quo.  The New York Times makes reference to a tax rebate for lower-income individuals, but again, the details of who would qualify for that tax rebate do not appear to be available at this time.  Once I publish this post, I’ll reach out to the Sanders campaign, but I’m fairly certain I won’t be able to get an official response as the internet’s least-visited personal finance blogger.

How Would I Change the Proposal?

In a word: Details.  I’d like to know to what extent I, as a non-millionaire, but prodigious saver, would be affected.  I am frankly okay with paying 0.5% on the way in order to support the programs proposed.  Here’s how I’d structure it:

  • All retirement accounts are exempt from the transaction tax on both purchase and sale.
  • All taxable accounts which have held the shares in question for over a year are exempt from the tax on sale.
  • If an exemption from the tax is not possible for retirement accounts, assess the tax on a sliding scale based on how long the position has been held in the account (essentially making “high frequency” trading in retirement accounts expensive, but buy-and-hold investing in retirement accounts as near to free as possible.

As I’ve said, I’m okay with paying .5% on purchase even if it’s also on my retirement accounts.  I’m not purchasing hundreds of thousands of shares at a time, and thus the impact to me is pretty minute.  I’m also a proponent of several of the social programs proposed, so I’m okay with doing my part to fund them. It’s fairly important to me that the tax be structured in such a way that the everyday investor is penalized less than those who capitalize on volatility.

What do you think?  Would you be okay with paying a 0.5% tax in any of your accounts to fund social programs?  Do you think reduced volatility will compensate for the tax with increased returns?  Let me know in the comments!

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