More than a year ago I wrote a post (see below) about taxing stock transactions. I suggested 10c per share on both sides. Some of our politicians are suggesting .025pct. There really is no reason not to do it either way. Spreads have narrowed in the past several years to pennies from nickels, dimes and quarters. So we know that the market can operate with the wider spreads. Historically spreads are the profit margin of market makers. Well in this era, who is a bigger market maker than the US Treasury ? They are providing liquidity at every corner, so why shouldn’t they (we) get paid for it ?
Of course like any other government attempt to raise taxes, how they use the money is where they will absolutely screw it up. In this example they want to use half the money to fund a Job Creation Fund. A government run Job Creation Fund is the ultimate Oxymoron. Let me offer another post of mine that suggests that we open the doors to entrepreneurs and simplify and cheapen their cost to start businesses. The process of creating a company in this country has become so burdensome at the hand of regulation, insurance, taxes and administrivia, that we are slowing the true job creation engine that this country needs right now. Instead of the Government funding jobs, if the focus is on job creation, which is what it should be today, these funds should be used to remove all friction to those who start, fund and run companies.
This is from an excerpt from a post of mine and it is exactly what a smart politician should propose today in order to stimulate the creation of jobs in this country
How to Jumpstart the Economy – Tax Free Small Businesses
Jul 28th 2008 10:13AM
What has impacted my decision on whether or not to start a business is the amount of paperwork involved and the local, state and employer taxes involved. Its complicated and expensive to start even the smallest business in the real world. The real world of course is different than the Internet world. The state of business, and in particular, entrepreneurship in the US has devolved into two worlds, the Internet and the real world.
In the Internet world, all you have to do is setup an account with an ad network, put it on your website, generate some traffic and they send you a check. . No licenses, no tax id, no announcements in the newspaper. It took me minutes. Its exactly what millions of people do as well and its created an entire Internet economy that lives off of Google, Yahoo, MIcroSoft, AOL, Ebay and others. Its the entrepreneurs path of least resistance, which is exactly why most take this route.
Compare that with setting up a real world business. This is from the State of Texas: (Which I am proud to say makes it far easier than most states to start a business).
Step 1:Legal Structure and Registrations
Step 2:Business Tax Responsibilities
Step 3:Licenses Permits and Registrations (Note to State of TX, this link was broken, I had to find the destination page )
Step 4:Business Employer Requirements
As an entrepreneur , I can tell you that working through the requirements of these four steps is scary and intimidating. Why ? Because to merely start your business, you have to deal with lawyers and accountants, which not only costs a lot of money, but more importantly, requires you to trust those lawyers and accountants to make decisions that could have make or break consequences on your business. You may have the best idea with the ability to execute on that idea, but one little snafu by these professionals and your business is down the tubes.
Even worse, if you mess up on any of this, you could get in legal trouble. You could get sued, or find yourself in the middle of some legal nightmare.
Then of course, there is the financial reality of having to pay all of the business and employer taxes and ever increasing insurance premiums.
Which brings us back to How to Jump Start the Economy.
If you want to see an immediate re invigoration of the economy, open the door back up for individual entrepreneurs to enter the real world without fear and without an immediate financial burden that pre empts their ability to be successful.
If we really want to stimulate job creation in this country, take the same approach to small business with 25 or fewer employees that we take to Internet taxes. Outlaw them.
No taxes or license fees of any kind on small businesses with 25 or fewer employees. No employer payroll tax. No state or local taxes. No taxes on earnings. No Payroll taxes. Nada. Use the money from the proposed taxes on the trade of public shares to fund not only this, but healthcare insurance premiums as well. The business owners and their employees will pay income taxes on their personal income , but not corporate earnings
The only taxes they would collect and remit are sales taxes and of course they would still file personal income taxes on their individual earnings.
Make this available exclusively to owner operated companies and only allow the operator to own and operate a single company (to prevent gaming the system).
The impact on the economy would be amazing and immediate. Those without jobs would be able to work for themselves. They would be able to join together and start companies. They would be able to take risks with far less capital and far less fear of failure. Sweat Equity would be all it takes to start a business. In addition, we would see many cash only propreiters go legit.
Not only would we see hundreds of thousands of new businesses started seemingly overnight, with millions of new hires, but from those new businesses would come new ideas that hopefully would give us our next engine for economic growth that super cedes today’s ideas.
For Congress, the challenge will be to keep the process simple. A simple no cost, online registration for the businesses, with information about the who, what, where and ownership of the companies so that they can track and help fund them. Which in turn would create the information base from which to fund the state and local revenue that would be lost. Easy ? No. But a far greater reward in job creation and growth for the country than the Government creating Job Funds and public works efforts.
In this economy we should open the door to our country’s Intellectual capital and the entrepreneurial energy that separates us from the rest of the world. Make it easy for entrepreneurs to do what entrepreneurs do, and great things happen. Voters and politicians alike seem to have forgotten what has made this country an economic powerhouse. We need to focus on creating a friction free environment for small businesses. That is exactly what will create jobs
Tax the Hell Out of Wall Street; Give it to Main Street
Sep 30th 2008 9:02AM
Tax every single share of stock that is bought and sold 10 cents per transaction. One dime. If you buy a share of stock, your brokerage pays a 10c tax. If you sell a share, your brokerage pays a 10c tax. 1 share, 100 million shares. Its 10 cents per share.
Of course the tax will be paid for by those of us who are buying and selling stocks. So what. Here is the reality. If you are a true investor. Someone who wants to own a share of stock in a company you believe in, then its an amount that is not going to impact your investment decision making process.
If you are a professional trader or an institutional trader that trades continuously, then it may impact your decision making process, but only to the point of reducing your returns by a minimal amount. Its not going to change your inclination to trade. If you make 9.9pct instead of 10pct, you aren’t going to stop trading.
Whats the economic impact ?
If the NYSE, Nasdaq, Amex and OTC are trading 2 Billion shares a day, thats $ 200 Million Dollars PER DAY. If there are 260 trading days a year. Thats about 52 Billion dollars a year.
Thats real money.
Of course there has to be some fine print. You could reduce the tax per share for stocks under $5 dollars to 5cents. But i would leave it at 5cents even for stocks priced at pennies per share or less. This tax would act as a protection for investors and traders who get pitched unregulated penny stocks and who are more often than not the victims of rip off artists.
Take this $52 Billion Dollars and ????. I will open it to the floor for suggestions and save my conclusion for a later post.
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We are a small farm raising pastured pigs and selling the pork to local stores & restaurants on our weekly delivery route. Getting slaughter and butchering is difficult as the number of meat processors has decreased giving the last few a monopoly. Our solution is we are building our own USDA/State inspected on-farm slaughterhouse and butcher shop. See this post which describes our project:
http://sugarmtnfarm.com/butchershop
The regulations are doable. The facility design and construction are doable. The problem is we can’t get a loan from banks. They keep saying they are not doing any loans for “new or expanding businesses”. We have a detailed business plan, the numbers work, we have a long history of excellent sales and a stack of letters of recommendations from chefs and other customers. But no loans from the bank. To date we’ve been bootstrapping with about $26,000 of money from our own pocket plus about $30,000 in micro-loans from individuals and extended terms from suppliers as well as CSA Pre-Buys of pork from customers. We’re making steady progress and only need about $100K more. We bailed the banks out, among others. It is a shame they won’t even make loans, loans that would help small businesses startup and expand.
-Walter Jeffries
Sugar Mountain Farm
in Vermont
Comment by sugarmtnfarm -
I agree with the basic premise. However, for shares under 10$, the tax should definitely be proportional or nonexistent. What you say is true about penny stocks, but if people want to trade pink sheets or penny stocks that’s up to them and we shouldn’t restrict people from what the want. A 5 cent tax would basically kill all equities 1$ or less. Of course this rule also has the upside that companies will do reverse splits and make their stocks much more appealing to everyone.
Anyways I basically agree, but I think it would make more sense to only tax stock/bond purchases (so that there’s no negatives to exit your positions).
Comment by acshen -
Mark, I am by no means a wall street fatcat I make about 75k working as an analyst at my job and daytrade for added income. This year my combined buy and sells will be around 100 million in transactions, which I am sitting on about 60k in taxable profits, so for the year so I will be paying income taxes on 135k. If the 25 bp tax floating around congress now was inacted I would owe 250k in taxes on just my trades. This will wipe out all daytraders.
The technology has improved and costs have come down which allow people to trade in penny increments. It is irrelevant what spreads were twenty years ago. Should we add a 30% tax to computers that are sold because technology has lowered costs to buy a computer. After all you can get a computer 30% cheaper today than a decade ago and people still bought computers back then. Should we put a 50% tax on NBA owners ticket revenues, after all ticket prices were 50% lower 10 years ago and the owners of NBA teams still made money.
Your plan would encourage every publically traded company to enact a 50 to 1 reverse stock split and would wipe out volume. Why would any company with a 10 stock not do a 50-1 reverse split to put their share price at 500 so someone who wanted to invest now would owe a 10 cent tax on 1 share instead of a $5 tax on 50 shares. This would wipe out small investors and severely dry up liquidity, not to mention all the volume would go to foreign exhanges, thus only causing more of an exodus of US jobs.
Why should the fruits of a trader’s profits, whose capital gains will be taxed at ordinary income levels, be redistributed to someone who wants to start up a business. What makes you believe someone who wants to start a business will be able to better spur the economy with someone else’s money, than the person who actually earned it would be able to spur the economy. This is the failed Obama/Keynsian idea that govt can create jobs through redistribution and we can print and borrower are way to prosperity. You may say that trading provides no economic benefit and that is tough to argue, but under the current boom/bust cycle the Fed has created and the debasement of the currency coupled with negative real risk free savings returns people are forced to risk and speculate with their savings versus sit in cd’s, money markets, etc at 1% interest.
The problem with the economy can be outlined below in this chart courtesy of Karl Denniger at the Market Ticker:
http://market-ticker.denninger.net/uploads/Dec2009/Absolute-Debt-GDP-9-09.png
Until the debt is liquidated their is nothing that can be done to create jobs and get the economy back on track you can tax traders, nba tickets or whatever but the bigger problem of too much debt in the system will still halt any sustainable economic growth. It is not that businesses/consumers cannot get loans, banks are begging to hand out credit, the difference this time is people actually have to have the ability to service debt now, and the pool of people with the ability to properlly service debt has shrank dramatically.
From MC> lets face the realities of day traders. First, its 100pct risk. You know it going in, and just hope you come out ahead. But if you are a day trader, thats what you do. I dont think the number of traders falls. Plus, you wouldnt pay a tax at the end of the year. It would be part of the spread and paid by the broker, exchange or market maker. It would just be a cost of the transaction. You wouldnt know or care how much you paid in that tax any more than you pay attention to how much you paid to the exchanges in fees, or to market makers in spreads.
I also believe that if Im wrong and volume falls materially, the brokers who cater to day traders will come up with a variety of ways to offset the cost to maintain volumes.
Comment by esebille -
Wouldn’t the tax revenues be double what you calculated? You want to impose the 10 cent tax on BOTH the buyer and seller.
Markets react. Companies would start by enacting reverse splits so we would see a lot fewer stocks trading under $1 … probably under $5 & $10. Brokerage firms would also break away from 100 share round lots.
Interesting proposal however.
Comment by onehandede -
I am looking for investors for my website I just launched. http://www.cardzam.com
Comment by kms281 -
Starting an “internet business” and putting ads on a website doesn’t absolve you from setting up as a “real business”. You still have to pay taxes on money earned, no matter where it comes from – internet or brick & mortar. The business entity you choose is a completely separate issue.
I do agree it would be intriguing to have tax-free small businesses, but as a CPA I think there would be a much higher amount of revenue lost than you realize.
Comment by Kevin -
stupid idea. It has to be a % not a set amount per share like 2 pennies. T
Comment by kendallcondos -
This post does include taxpayers’ biggest worry though—-and that is, how the revenue raised ends up being used. I am pretty much opposed to ANY new tax scheme, whether it is on soft drinks, securities trading or diapers—-and am unlikely to change my position until I feel that the taxes already being collected are being used more efficiently.
On an unrelated note, please Mr. Cuban, consider purchasing the Pittsburgh Pirates! There isn’t enough challenge with the Cubs or Dodgers—the Bucs need a makeover on and off the field, and you are one of a select few who can actually make it happen.
Comment by dcangelo -
Mr. Cuban,
I’m an entrepreneur, manager at an internet business, employing more than 100 people after 6 years in business. I’m located in a medium-sized midwestern town. Our company has purchased literally thousands of computers in developing the business. We’re among the highest paying employers in the town, and one of the largest commercial leaseholders. So much for my credentials. Did you ever know someone, a business acquaintance, perhaps, who was impressive in the breadth of his knowledge, a seeming genius, always holding forth on this or that topic as if an expert at all things. One whom you grew to trust as a source of interesting knowledge of the world, as a fount of clever ideas. And then one day, that person wanders into your area of expertise, something you really understand, and you suddenly become aware that the same glib style, the same air of know-it-all that seemed so genuine and believable when applied to something you yourself did not know, is utter baloney. That this person knows literally nothing about which he is so believably blathering. You, sir, have achieved that quality for me. I have enjoyed reading your comments, hearing your ideas, and I have defended your behaviors to my colleagues in spirited arguments. You see, the business I’m in is a trading business, creating value in ways you apparently could never understand. Your suggestion for taxing financial transactions makes about as much sense as an ex post facto law to clawback all the profits of any person who made more than $100M during the internet boom. Know what I mean? Or how about a tax on tickets to that gem of American productivity and value, NBA games. The trading business is now often a small firm, entrepreneurial niche in our economy, one that you would trample willy-nilly out of incredible ignorance. Get a clue, bro, the tax you suggest would reduce trading volumes by 50% on day one, and your specious calculation of the expected tax revenues is a bad joke. I just love people who say out of one side of their mouth that tax holidays are a great idea to stimulate their favorite ideas, however dimly understood. Because without exception, they want to pay for these schemes by increasing the taxes on businesses they don’t favor, or simply don’t understand, like you.
Comment by slackful -
Re; municipal unions.
First let me say both my parents work for the NYC public school system and have exactly what you describe, great defined benefit pension plans. In my opinion union demands are a cost of doing business. Look how most production industries eventually consolidate into a monopolic or oligarchistic form of business. There are a few firms that eventually rule the supply and distribution chain. Well, unions mirror that process on the employee side. In a simple supply and demand economic view, worker unions are probably both “unfair” and ineffecient in the grand scheme of the market. But look how a company like Microsoft handles its business. Would you call it “fair” or effecient for the O.S. market? Probably not.
In a perfect world we’d like to see unions dissolve, but we’d also like to see employers treat their workers fairly and play fair in the marketplace. But that’s what I’d call a pipe dream.
Comment by loucons -
Hello Mr. Cuban,
First and foremost, Happy Thanksgiving!!!
Please excuse me for using this article to post my pitch. I follow your blog and mean no disrespect for posting my pitch within this comment section.
I have an investment opportunity for Professional Team Owners. You are the first owner that I have tried to contact on this matter.
This investment will drastically lower the cost of signage and bring in new sponsorship revenues. Every team, sponsor & traditional business in the world must use signs to promote their company.
We focus mainly on retail franchise accounts for our signage sales. Every time they make a purchase they earn points, the points can be used on signage and/or sports marketing advertisement.
While this is not the greatest thing in the world for a small company, it will get the attention of every large franchise that also spends a great deal of their advertising budget within sports. Is there really a better way for a company to advertise with professional sports without having to spend a dollar of their own advertising budget?
Please consult your people about how much you spend each year on signage. Then allow me to present to you the savings you would have earned with Ballpark Signs.
All I need is one powerful professional team owner to make this one of the largest companies within both the sign & sports marketing industries. If you would like more information lowering the cost of your signage, while bringing in new sponsors for you team, then please send an email to mark@ballparksigns.com
Thanks For Your Time,
Mark Foran
Ballpark Signs
Retail Signage & Sports Marketing
Comment by ballparkmark -
Mark,
I agree the markets and many traders could certainly survive with wider spreads, but the volume would fall significantly, and that’s a huge problem on several levels. First, the revenue projections would be nowhere close with, say, 5% of present volume. I am sure you would at least concede volume would decrease substantially with any tax on a per share basis? (And what do you suppose would be the gov solution for short rev projections? Yes, increase the tax.)
Secondly, and perhaps most importantly, think of the larger implications of decreased market liquidity. What are the goals/reasons of those that do go public? Every VC and investor wants an exit, right? I’m sure you wouldn’t have enjoyed liquidating your YHOO holdings with 5% of the volume?
Comment by davidpazdernik -
Mark, I would like to hear your insights on what I consider is THE largest financial problem the US faces today: namely municipal unions.
Those taxpayer supported unions have generous pension plans that would drive any private entity into the ground. I have statistics that would make you sh*t your pants as to how much these defined benefit pensions alone cost taxpayers. Ridding this burden and replacing it with 401k contributions would greatly alleviate our tax burdens, yet there is not a politician out there who will speak out against unions. WWMD?
Comment by therugelachman -
As an entrepreneur, I know first hand the burden the city, county, state puts on someone like me. Chicago is an absolute nightmare. Living 20 minutes from the Indiana border, I am considering locating my baking operation there, where the taxes are more reasonable as well as the commercial lease rates. The best part is that since half my business is in Illinois, my customers would no longer be charged the 10.25% sales tax.
Comment by therugelachman -
I agree, we have a sales tax in most states, there’s no reason that selling a security isn’t as legitimate a transaction as selling a bicycle. If it removes some overall trade volume, so be it. I don’t see the problem. That industry is saturated as it is. Like David alluded to, the margins have become so small due to massive industry competition.
Stock trading and the financial industry in general add little value to the economy, quite frankly. The industry is based around allocating money most efficiently. But look at it this way: we passed a $700 billion bank bailout and a $787 billion economic stimulus. So our government is treating the financial industry as half our our entire economy. Is moving money around and charging different rates of interest really THAT important?
We should limit the amount of tax relief and gov’t assistance to the financial sector and instead support the production of goods and services which the financial sector is based on. But of course there are rich and important people at the head of the financial industry who take a more than fair share off other people’s sweat equity who would rather that not happen.
Comment by loucons -
Mark,
First let me say I am a huge fan and generally agree with you on most economic issues.
On the issue of taxing equities trading, you couldn’t be more wrong, however.
As a former trader, I can tell you with certainty that approx. 99% of the volume on major exchanges comes from traders. As somebody who traded 100,000 to well over a million shares per day, there is absolutely no way a tax of any kind could be absorbed. The SEC fees, ECN fees etc are already getting out of control and are difficult for many traders to overcome. A tax on stock transactions of any kind would result in the markets screeching to a stop–the volume and consequently the supposed tax revenue would absolutely disappear.
A very small day trader trading 50,000 shares per day and paying, say, 5 cents per share in tax would result in an additional cost (tax) of $250 per day. It is simply not possible for traders to exist in that environment–even at a penny it would be impossible.
I know when most people think of traders they picture a former Goldman Sachs fatcat with a billion dollar hedge fund making tens of millions per year. And while those guys do exist, the reality is even a tiny tax would kill most every trader, including many of the big guys out there.
Please rethink your position.
David
From MC>Dont agree at all. Day traders traded when spreads were much wider. Big guys traded when spreads were wider. They will still trade because thats what they do. Maybe they wont flip as quickly because the trade has to produce a better return , but thats the same risk any investor takes.
Traders trade. What are they going to do , work at burger king ?
Comment by davidpazdernik -
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