From "Death Panels" to "Taxing your 401K"
Misrepresentation to protect corporate interests has become just the knee-jerk reflex of the rightwing. They don't seem to think they can win any argument based on promoting alternative proposals as more effective or ideologically more appealing-- they just seem to immediately reach for the distortion.
So the AFL-CIO and some allies came out with a proposal for a tiny tax on stock transactions -- about one-tenth of one percent of each transaction -- an amount that individual investors making long-term investments would barely notice. The goal is to raise revenue off the large-scale traders like Goldman Sachs and discourage high-frequency traders using computers to game the stock market. "High-frequency trading is estimated to earn about $20 billion in profits for the nation's biggest investment firms, who guard the their practices zealously."
And of course the rightwing immediately just labels the proposal as the "AFL-CIO's Tax on Your 401(k)"
Now, the median 401K account balance is just under $19,000, so even if every American with a 401K (which is not even close to everyone) traded their whole balance each year (not common in fact), then they would face a tax of $19 per year from this proposal. So for all but a tiny minority of Americans, the tax would be essentially non-existent.
Yet it would raise $50 to $100 billion a year from the financial speculators who crashed the economy, helping to offset the debt piled up this year saving the economy -- and in particular, debt that helped keep companies like Goldman Sachs afloat in the first place.
But here you have folks like Grover Norquist's Americans for Tax Reform flacking for the richest speculators in the country, hyping this as a tax on average Americans. If the rightwing wants to make the principled argument that taxing speculation will distort the market in unfortunate ways or that on principle, it's better to cut Medicaid spending than tax the wealthy, then more power to them. But the fact that they have to promote fear and distortion of the real effects of proposals just emphasizes the ideological bankruptcy of the modern rightwing.
Democratic commentators need to begin using the word LYING in response to statements like that. Not "distortion" or "misrepresentation" - LYING.
September 2, 2009 10:35 AM | Reply | Permalink
Actually, you're wrong about the effect on the average person. Remember that 401k money is mostly invested in mutual funds. These funds turn over their portfolio more frequently, so this tax would effectively increase the expense ratio by from 0.1 up to several tenths of a percent, depending on a particular fund's turnover ratio. Given that expense ratios are typically less than a percent, this is a big increase.
September 2, 2009 10:48 AM | Reply | Permalink
No-- most mutual funds turnover less than 100%-- see http://www.fool.com/School/MutualFunds/Costs/Turnover.htm
And if the tax encourages mutual funds with higher churn to slow their own churn to compete based on lower fees, that may help encourage longer-term investing across the whole investment field.
September 2, 2009 11:01 AM | Reply | Permalink
The average is 85%, so most funds turn over almost their entire portfolio every year. When the long-term average gain of the stock market is 8%/year, the added tax would reduce your return by a significant amount. Compounded over 30 years it makes a significant difference.
Besides, why is a lower turnover ratio better? Someone explain why long-term holding is objectively better.
September 2, 2009 2:01 PM | Reply | Permalink
Yes, and 0.1% is pretty miniscule-- as noted about $19 per year for the average 401K. SO why the hype over it, when the brunt of the tax is on the traders who churn their assets multiple times per week or even per day?
September 2, 2009 10:05 PM | Reply | Permalink
Consider that high frequency trading account for 40% of stock market volume. This tax would reduce volume by at least 40%, probably closer to 60-80% when the medium-frequency guys are pushed out of the business also. Then guess what happens? The bid/ask spreads (the price at which you can easily buy and sell a stock) which now are typically 0.1%, will be more like 1/2% or 1%, like it was back in the 80's. This tax would kill mutual fund returns far more than 0.1%.
September 3, 2009 10:35 AM | Reply | Permalink
You may not understand this, but most 401k's are invested in mutual funds. So an individual long term investor may not change mutual funds often and therefore not pay the tax often. However, the mutual funds will be paying that tax, and therefore the return on those funds will be smaller. When we considerthe difference in compounding over a 40+ year time frame, that tax will make quite a dent.
First, that this is an indirect tax on 401k's invested in mutual funds is simple reality. Second, everyone but the terminally dense know that new taxes start small and grow over time. Therefore, pointing to a low introductory rate is a bit like saying teaser rate mortgages are low cost. Social security started in the 1% neighborhood, and the income tax started at 5% only for the very rich. Most state sales taxes follow the same pattern. There is no appatent reason to believe this tax will be any different in this regard.
September 2, 2009 11:03 AM | Reply | Permalink
So, to keep from paying a tax on investments (or losing returns on 401Ks), we should just let Goldman Sachs keep doing what they're doing until they crash the economy again and your 401K loses another 40% of its value?
The tax on cigarettes keeps going up, too.
Let it rise. Let those who engage in risky investments bear the burden of their own bailout. Let those who game the system pay a heavy toll to play. Maybe that will encourange more sound, longterm investment from everyone, including the mutual funds in your 401K.
September 2, 2009 12:36 PM | Reply | Permalink
Actually, high-frequency trading did not crash the stock market. It happened when these company had all their risky and re-packaged financial derivatives blow up. If a stock price is dislocated due to high-frequency trading, any investor is welcome to buy the shares and make a killing. High-frequency trading doesn't even introduce excess volatility. Look at China, having a transaction tax and much lower volume, the market swings up 5% one day, down 8% the next. How about some common sense regulations on derivatives, restoring fair accounting and mark-to-market, instead of taxing the American public?
September 3, 2009 1:34 PM | Reply | Permalink
I didn't say it did. But it might lead to the next one.
September 3, 2009 2:52 PM | Reply | Permalink
As noted above, most mutual funds don't churn more than 100% a year (and most analysts think they churn too much, so discouraging churn in mutual funds could be a side benefit of the tax).
And let's say the transaction tax on stocks grows, let's say it grows astronomically by quintupling. That means the average 401K holder will pay a grand total of $100 per year -- and they will receive all the services that $250 billion to $500 billion raised per year from such an increase would pay for.
And notably, the income tax rate for most families has dropped in recent years-- many pay nothing these days if you have a couple of kids and have a moderate income. So it's not accurate to say that taxes always increase.
September 2, 2009 12:52 PM | Reply | Permalink
No, it's accurate to say taxes always increase until the Republicans take control, then they decrease. Glad to clarify that for you.
September 2, 2009 1:31 PM | Reply | Permalink
It's too bad they cut taxes, but don't have the ideological fortitude to cut spending.
And of course, Bill Clinton did cut taxes for a large number of lower-income working families when be increased the Earned Income Tax Credit. (And of course, as Reagan liked to note, John F. Kennedy cut taxes quite a bit as well).
So the accurate statement is that taxes on the wealthy are cut when Republicans take over-- so as amended, your statement is accepted.
September 2, 2009 1:37 PM | Reply | Permalink
....and after "the Republicans take control", are there any other consequences that come to mind?
After 8 years of the tax cutting George W. Bush administration? His unfinished wars, his 'worst recession since the Great Depression', 'protecting us' on 9/11, his bailouts of Wall Street, his promise to balance the budget in 2004 but left office adding $5 trillion more in debt, etc. etc.
Oh, I forgot, cleverbulldog, being Republican means never admitting your GOP president was a tinpot dumbass war psycho who did more damage to his country than bin Laden could ever dream of.
September 2, 2009 5:05 PM | Reply | Permalink
Quintuple? That may neatly double the maintenance costs on many mutual funds. It seems the homework has not been done on this proposal.
Queations that answers should be readily available to are the following questions:
1. What effect will this have on the rate of return for the average mutual fund?
2. What would be the net difference in end values with and without the tax in the 401k mutual investor that invested say $5,000 a year for 40 yeats in average turn over mutual funds and changed funds every three years?
3. To what extent will US jobs and US tax revenue lost as mutual fund buyers switch to UK or Canadian based funds.
September 2, 2009 4:20 PM | Reply | Permalink
I believe the UK already has a transaction tax, and I believe it is 0.25%. But I am working from memory.
Perhaps you should Google that and tell us what effect it had on thier mutual fund industry when it was enacted.
-- ARG
September 2, 2009 5:32 PM | Reply | Permalink
What is the reason that this tax proposal cannot exclude mutual funds and 401k holdings? It seems Goldman Sachs is just an excuse to tax 401k's.
September 2, 2009 12:58 PM | Reply | Permalink
I'd actually think you could offer an income tax credit paid for by revenue from the tax to offset any individual costs for most taxpayers. But just categorically excluding mutual funds would just mean that folks could game the tax by investing in stocks through large-closed mutual funds.
Pathologically building loopholes into straightforward taxes is what encourages too many games in the first place. The tax has a nominal burden on most families which can completely be offset by a small tax credit. Far more straightfoward than excluding whole classes of investment vehicles.
September 2, 2009 1:19 PM | Reply | Permalink
What you said.
September 2, 2009 1:22 PM | Reply | Permalink
Because 401Ks and mutual funds would use the exclusion to engage in the very behaviors that the tax is designed to discourage.
September 2, 2009 1:21 PM | Reply | Permalink
Is the tax designed to raise revenue or change behavior? If you just want to change behavior, changing the long term vs short term tax rates will do that. The real impact of this tax would be on short term day traders who might make thousands of trades per year.
September 2, 2009 4:16 PM | Reply | Permalink
That is how I understand it, but I think it's aimed more at the computerized traders who make millions of trades a day that do little more than skim resources out of the unstable economy, not day traders working out of their basement.
September 3, 2009 11:23 AM | Reply | Permalink
I am a long time democrat and am disgusted by the "class warfare" being practiced by the democratic party. This tax is not little. As an ordinary person who lives out of her investments in a tough job market, let me tell you this tax will hurt the little guy.
When you talk about an extra $100 to $300 for the 6 Million unemployed in this country who may be dipping into their investments to get by. That could make the difference between them paying the mortgage that month or losing their homes. You have a job Mr. Newman. So, it is unfair for you to judge what is a small amount for an unemployed person who is living out of their investments.
This tax reeks of class hatred. I did not become a democrat to hate anyone because of class or race.
September 2, 2009 9:59 PM | Reply | Permalink
Class hatred? More rightwing rhetoric. Asking those making billions to pay a bit more taxes to fund health care and education while other are unemployed is hardly hatred.
And the biggest problem facing most of the unemployed is the cost of health care once they lose their job. If this tax can put billions more into health care for the uninsured, that is worth far more for family budgets than the $19 I cited for most families.
But no doubt the distortion will keep coming-- "death panels", "class hatred", "tax on your 401K."
September 3, 2009 7:06 AM | Reply | Permalink
This tax will not just affect mutual funds or Goldman Sachs. It will affect every investor in ways that cannot be imagined at this time. This tax makes it prohibitive for active traders to trader. Many of these traders trade multiple times daily. For this type of trader this tax will amount to $100s per day, which will not be viable. And therefore, these traders will have to find other places than the US to trade, or quit trading altogether. No problem you say? Yet these traders are the ones who provide liquidity in the marketplace. When they are gone, the willingness to buy or sell at prices close to the last price will evaporate overnight. Volume will shrink. The markets will become even more volatile. And everyone, small guys, mutual funds, anyone wanting to make an investment will pay the price of no liquidity and volatility. This is what you want to happen to the premier markets in the world? Oh, that tax you think you're going to collect is a figment of your imagination. When all the active traders quit because it is no longer viable, the volume declines, and therefore the tax receipts decline. It will be an illustration of the law of unintended consequences. I'm not sure why anyone here thinks Goldman Sachs is their enemy, anymore than their Senators and Congressmen, or in fact, the AFL-CIO who was responsible for the excessive wage and benefit demands of the workers in the auto industry, which led to their demise and the taxpayer bailout. And now you want to take their advise on a subject they clearly are not qualified to express an opinion about?
September 2, 2009 10:29 PM | Reply | Permalink
How can you compare outrage over a $100 billion per year tax on investments (retirement or otherwise) to death panel propoganda?
Do you want to "punish" people for seeking returns on capital that do not fit your investment time horizons (selling an investment to soon is somehow less virtuous?) Or are you seeking a new source of tax revenue?
If you want to punish people for not holding investments as long as you find acceptable how do you define your acceptable. Is it your business how often an individual, mutual fund, money manger, pension fund, etc, should hold an investment?
If you want to generate more tax revenue, don't you think sucking upwards of $100 billion PER YEAR out of our counties personal investments is excessive?
Remember Pension funds, mutual funds, endowments,trusts, are the source of this "small" tax.
You obviously do not understand how hard it is to grow capital. When you net all of the losing investment from profitable ones the overall margin of profit is thin. This $100 billion yearly tax will eat away at this. At a time when people have lost jobs, and money on their homes and their retirement accounts, and are in a deep recession raiding peoples investments to the tune of $100 billion per year in new tax increases is irresponsible.
September 2, 2009 10:32 PM | Reply | Permalink
Discussions of this "Tobin tax" are resurrected occasionally over the decades, I was made aware most recently in January of 2009. The proposed percentage at that time was %0.25.
I was really curious how this would effect my wife and I. Using an Open Office spreadsheet with all transactions in our IRA for the last 12 months I did the following. I added another column which simply multiplies the trade amount by .0025 only if the activity type is "BOUGHT" or "SOLD". Summing that column I get $2,609.85
My biggest issue with this tax is that Mr. Obama stated that he would not raise taxes on those who make less than $250K. Our combined AGI was just over $100K in '08 so we sure fit the description yet if this tax passes our taxes will increase by roughly $2,600/yr.
I did a lot of homework on this topic back in January. If I get some time I'll find it and post the salient details. Suffice it to say this tax penalizes many more average people in more ways than you may have imagined. And in general squelching free market activity is not such a red hot idea either.
September 2, 2009 11:43 PM | Reply | Permalink
For you to calculate that the tax at that amount, you would have to be trading over $1 million in assets each year. That's either an incredibly high degree of assets for your income level or an incredibly heavy churn in your portfolio-- neither of which are common for most middle class families.
Speculation and churn in the financial markets is not "free market activity" but a particular class of transactions that many analysts see as irrelevant or even undermining of actually productive economic activity in the economy. So discouraging such churn in favor of longer-term investments is hardly anti-capitalist, just anti- a particular form of trading, which is quite a different thing.
September 3, 2009 11:37 AM | Reply | Permalink
I see. I neglected to read the fine print. Your taxes will not be increased if you make less than $250k *unless* you are "uncommon" as determined by Nathan Newman.
Admittedly the following is a collection of half baked and somewhat random thoughts. But I felt they were worth sharing.
I would LOVE, I repeat, LOVE to buy a basket of stocks today and not touch them 'til I retire! In fact that is what I strive for! The reality is that is impossible in the world we live in today, you MUST actively manage your money. Buy and hibernate just does not work. I do a significant amount of fundamental and technical research before I buy, today to minimize the amount of commission we pay, perhaps tomorrow to reduce the amount of tax and commission we pay.
It's apparent you prefer to deal in uncertain terms ("tiny", "barely notice", "nominal burden", "incredibly high degree" etc.) that's fine for this blog like venue. But now look how you're trying to define free market activity "speculation", "churn", "particular class", "many analysts". Frankly it's difficult for me to discern fact from opinion. However regarding speculation, if you do not realize that money placed in the market regardless of intended time frame is speculative in nature do yourself a favor and open a savings account now.
Perhaps you could tell me what number of trades in my IRA every year is acceptible? Perhaps that would help to solidify the terms "incedibly high degree", "churn", "particular class" and possibly your definition of "free market".
Lets talk distortions for a moment. Where did you come up with $19K? Have a look here:
http://www.usnews.com/blogs/planning-to-retire/2009/05/19/did-you-lose-more-in-the-stock-market-than-your-peers.html
Allow me to play a numbers game, heck Nathan did it why can't I. Mine will actually be accurate however. US News and World Report says the average 401K balance at the end of 2008 was $57,200. For workers in their 50's the balance was $99,420. Lets round that up to $100K to make the math easy. Now every body should review their portfolio quarterly if not more frequently. If workers in their 50's do this and do actually turn their complete portfolio at each review that's a transaction tax of $800. That's $100 to sell then $100 to buy so $200 at each review then times 4. Workers in their 50's can (and should) also contribute $22K per year in 2009, that'll be another $22 in taxes. So this "tiny", "insignificant" tax is now up to $822. I can hear Nathan now, "But that's highly uncommon!" Well it really needs to be common! Wake up and take control of your money people. Was that a soap box moment, sorry. :)
I guess I can play the "non-specific" game too. I know many financial advisors that strongly advocate taking charge of your financial future. I'm also an optimist; I believe more people will take charge of their financial future. It is however a crime to punish these people with a tax put in place by clever, mis-informed politicians who were trying to cease high frequency trading while increasing tax revenue.
And think just for a moment about the dichotomy of "tiny tax" and "raise $50 to $100 billion". Do you really believe that somehow we'll just close our eyes, implement this tax and it'll magically penalize all those nasty investment firms without impacting innocent individuals? I've got news for you collateral damage will be significant and two fold. First it WILL tax individuals directly. Second money paid in taxes by the investment firms will not come out of thin air, you guessed it, it'll be passed on to their clients.
And lets also speculate for a moment why the AFL-CIO could possibly be interested in a transaction tax. Hmmm... Quite curious... Oh I see they suggest the money raised should be used to build new infrastructure. Well now that seems like a noble and patriotic use of this new windfall. Oh and did we mention this infrastructure will be built by union workers. Ah ha, now I see. I'm not anti-union however I do think they've run their coarse. In any case understanding their motivation helps put this argument in perspective.
Finally Lets talk about what caused the recent economic crisis. The reality is it had very little to do with too much equity but a lot to do with too much debt. Taxing equity transactions does little to solve the problem. In fact it tends to give favorable treatment of debt relative to equity. What does this do? It encourages yet more leverage in the system. NOT a good idea!
On one hand I'm sorry I've wasted my time here. On the other I feel it was time well spent as it has helped "sharpen my tools" for use fighting this insane tax in places where it really counts.
September 4, 2009 11:55 AM | Reply | Permalink
This proposed transaction tax will result in failure.
Proponents of this tax claim hundreds of billions in revenue will be gained annually. The Independent Budget Office of New York City determined that a much smaller transaction tax would result in net negative revenue. The higher the tax, the lower the revenue with hundreds of thousands of jobs lost, most of them not even directly related to finance.
The Canadian government's Staff of the Parliamentary Research Branch did a comprehensive study on the transaction tax in several other countries that actually still have or had the tax. Conclusion of their study: "Sweden, on the other hand, appears to be a classic example of an experiment gone wrong, while Germany, like many other countries, has decided that the costs outweigh any benefits from this type of tax."
For those seeking revenge: The large institutions that were recently bailed out will be exempt from this tax as they are in the UK. If not exempt, they have the means to find a creative way to avoid it. Only the average investor will be left paying this tax, same as they do in the UK. Small trading firms will fail as this tax will be way too expensive. Brokerage fees from reduced competition will increase substantially as a result of these failures. Mutual funds will pass the cost on to investors as a result of reduced yield. Liquidity will be reduced by 90%. That means stock investors, or an investor's fund manager, will be paying 50 cents per share instead of the current 1 or 2 cents. All that and more plus the actual tax will cost at least 1% lower gain annually. The funny part is you will pay this tax even if you have a loss for each year. Of all things, a tax on losses. The greatest loss is from reduced compounding. Find a retirement calculator and compare a 1% difference in annual yield, and you will lose one third of your retirement to this tiny tax over a lifetime of investing.
Politicians must surely be aware that there are more than 120 million Investor Class Voters ready to purge congress once they understand the consequences of a tax like this.
September 3, 2009 2:12 PM | Reply | Permalink
Wow-- an actually substantive criticism of the proposal, at least on its effectiveness in the first part of the comment. Te second part goes off into crazy land again in arguing this would lower the yield by 1% annually (just stated with no citation to even try to substantiate the argument). But hey it's a start in leaving crazy land which most conservative rhetoric can't even budget from.
September 4, 2009 9:33 AM | Reply | Permalink
Nathan,
Consider the political fallout from this tax. 180 million investor class has their life savings invested in 401k's, IRA's, Mutual funds, and money mangers. Most of them are middle class and are saving for retirement.
Self directed investors will see through this "small " tax right away. They are very aware of the affect transactions costs have to their yearly returns. They will be the loudest early on. They question how you can charge a tax on trades and investments place in a tax free or tax deferred account like an IRA or 401K and provide evidence from their own accounts how much this tax really is. Obama promised no new taxes on those making under $250k. Remember Bush 1 "read my lips no new taxes"? This is a tax on their retirement accounts and life savings which will go over like a lead balloon.
It will not take very long for the Passive investors (those investing via mutual funds, money mangers, pension funds) to see through selling points, like this is a tax on wall street speculators. They will find out very quickly that their returns in these funds are being fleeced by the government to the tune of $50 billion per year and they will revolt in a major way at the ballot box. On the surface it sounds like a small tax, but when you dig a little deeper you will find these institutions make millions of transaction on behalf of their investors every year. The average mutual fund turns their portfolio over at least once every year, money managers are often more active and this tax will be passed along to the investor. This tax will be levied even when they lose money on an investment adding to losses in bad years.
To add insult to injury, the big Wall Street institutions will more than likely be exempt as they are in the UK. This tax will fall on the shoulders of small mom and pop investors, trying to save for retirement. People will really like hearing about that after being told this is a tax on wall street speculators.
Any politician associated with this will be toast.
September 4, 2009 4:08 PM | Reply | Permalink