Well, finally a big government politician who admits it.  It’s almost refreshing.  Rep. Keith Ellison (D-Minn) said in a July 25 Round Table with Progressive Democrats of America, “The bottom line is we’re not broke, there’s plenty of money, it’s just the government doesn’t have it."  This statement is amazing as we approach a $17 trillion debt.  The statement also demonstrates what he, and probably most liberals believe: the money you earn, either through hard work or by investing, really belongs to the government.  And it is up people like him to decide what the government will give to you to keep and how the government should spend the rest.

Rep. Ellison was discussing before the group his legislation, H.R. 1579, the “Inclusive Prosperity Act of 2013.”  What it would do is tack on an excise tax, as much as a 0.5 percent in some cases, for each trading transaction of stocks, bonds or other securities.  The tax revenue would be used to fund more government programs “that protect our health and environment, investing in water and wastewater infrastructure, rebuild our crumbling physical infrastructure, and create good paying jobs.”  Hmm, more big government spending... where have we heard that before?  And its worked so well -- just look at our stagnant economy!

But what Ellison and others that favor this tax do not understand is that it would be destructive to the economy and to investors, particularly small investors.  It is investors that help to create jobs and make the economy to grow.

The Congressional Budget Office (CBO) said that taxing financial transactions would make financing investments more expensive, financial markets less liquid, and management more costly, eventually leading to fewer investments.  With fewer investments, capital and output is reduced.  Furthermore, CBO also points out that the market for U.S. Treasury securities is one of the most active securities markets in the world.  Because of their good quality it is the mostly widely held security in the world with foreign holdings accounting for 45 percent.  In addition, many mutual funds and banks are major investors.  CBO states that yields on Treasury securities are very low, less than a percent for those that are held for fewer than five years.  Adding a transaction tax on Treasury securities could be very large in comparison to their current costs and yields. 

And while supporters of the bill believe the tax would curb day-trading that would help to reduce instability in the markets, it would also discourage transactions “by well-informed traders and transactions that stabilize markets.”  CBO also said that “a number of research studies have concluded that higher transaction costs are associated with more, not less, volatility.”

David C. John and Curtis S. Dubay of the Heritage Foundation note in their study, “Financial Transactions Tax Would Hurt the Economy and Kill American Jobs,” the tax would be harmful to the smaller investor.  Such a tax would also apply to trades made by fund managers that handle investments for retirement plans such as 401(k)s and IRAs, 529 college saving plans, annuities and so forth.  Because the tax would often exceed any trading profit, it would come from the underlying investment.  This would reduce growth or the total savings of the investment.  John and Dubay also state that because the tax would likely be higher than the profit, it could cause a “lock-in” effect, similar to a capital gains tax.  When investors hang on too long to poor performing assets, the value of the investment is reduced.

Ellison says George Soros, Bill Gates, Warren Buffet, Paul Krugman and a host of others favor a transaction tax.  Of course any of these individuals can pay more in taxes any time they want or they can go to the Treasury Department’s “Gift Contributions to Reduce Debt Held by the Public” website.  As of this writing, approximately $1.5 million has been contributed in 2013.  Looks like some of these wealthy individuals aren’t donating their “fair share.”

David John and Curtis Dubay say in their study what most true free-market supporters and smaller government fans already know when big-government spenders try to tax the “rich.”  While the intention of the transaction tax is to go after Wall Street speculators and those with wealthy stock portfolios, it is  the little guy that will get hit.  Speculators and the wealthy would move their activities off-shore to tax-free havens.  The majority of investors who are simply saving for college or their retirement would eventually bear the brunt of a transaction tax.