What Investors Need to Know About the Financial Transaction Tax

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What's happening in the headlines can affect you as an investor. Here's what's going on, what you need to know, and what you should do.

The cold, hard facts
Reuters is reporting that two Democratic congressmen, Rep. Peter DeFazio and Sen. Tom Harkin, have each introduced a bill in their respective chambers that would impose a new tax on financial transactions. The percentage would be 0.03% and would apply to stock, bond, and derivative trades. If passed, the tax would take effect in 2013.

Some context
A financial transaction tax isn't a new idea. In recent years, similar bills have been introduced but haven't gotten anywhere. That's because the tax would hit high-frequency traders the hardest, which includes the likes of JPMorgan Chase (NYSE: JPM  ) , Morgan Stanley (NYSE: MS  ) , and Goldman Sachs (NYSE: GS  ) , i.e., big investment banks that make a lot of money from high-frequency trading and have a lot of influence in Washington.

The theory behind the tax is, by penalizing the high-frequency traders, you remove trading volume and therefore some volatility from the market. DeFazio called high-frequency trading a "blight on the economy" and said the proposed tax is low enough that it would have little effect on traditional financial trading, aka what the individual investor does.

What it means for you
Debt-strapped governments around the world are desperately looking for new sources of revenue. A financial transaction tax is also a hot topic in Europe right now. But with a Republican-controlled House, and even a sitting president who has voiced opposition to such taxes in the past, it's unlikely this bill will get any traction.

Additionally, with the big-money investment banks certain to oppose this measure, you can rest assured that even this minuscule financial transaction tax won't make it through to you.

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Fool contributor and newshound John Grgurich loves his Reuters feed so much he wants to marry it, but he owns no shares of any of the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a scintillating disclosure policy.

Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 04, 2011, at 2:47 PM, captainccs wrote:

    A small transaction fee would help kill off the most leveraged trades which is not a bad idea. The root cause of our problems is excessive debt. Leverage is just one more form of debt. Abusing debt is like abusing alcohol or abusing drugs, a short high and a permanent crash. Jackson crashed, Winehouse crashed, LTCM crashed, MF Global crashed, Lehman crashed...

  • Report this Comment On November 04, 2011, at 6:25 PM, XMFGrgurich wrote:

    Ha ha. "... Winehouse crashed ..." Very nice, captain. Agreed on all fronts, otherwise. Thanks for the comment.

  • Report this Comment On November 05, 2011, at 4:12 AM, farmrdave wrote:

    Taxation is a fee collected to pay for services provided by the government for those persons who pay the tax. If a tax is collected, the beneficiary of the services paid for by that tax must be the persons or segment of society paying the tax. Taxes must never be used to manipulate our industry, medical, or financial institutions. Tax money must not be used for undefined purposes. In Europe they may have a different Constitution than we have (or lack of) and may be different. Please get involved and vote in the upcoming election. We must stop the runaway government that is ruining our American dream.

  • Report this Comment On January 05, 2012, at 6:58 PM, rebutton wrote:

    Farmrdave made up a rule about taxation; i.e. the proceeds from a tax must benefit (specifically) those who pay the tax (and not benefit others). If a FTT stabilizes markets, if the degree of liquidity provided by HFT is superfluous then the tax is justified by the greater good, not by a compensating benefit to the high frequency trader.

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