Pros and Cons of a Financial Transaction Tax

The tax system has gotten out of balance in the last decade with more loopholes and deductions for wealthy taxpayers than for wage earners. The tide has already started to change with the Net Investment Income Tax adding an extra 3.8% tax passive income for high earners. Now congressman Chris Van Hollen, (D-Md.), has announced he is introducing legislation to provide a “Paycheck Bonus Tax Credit” of $1,000 for every worker, which would be paid for with a flat tax on financial transactions. This tax likely won't get passed now, but it is expected to be a hot issue in the 2016 elections, so it is bound to come up again soon, and it actually isn't as bad as it seems at first glance.

Understanding a Financial Transaction Tax...

How can another tax be good?

At first glance this seems like another ridiculous unfair tax, but the truth is that it is coming sooner or later, so we might as well examine both the good and bad this type of legislation will bring. I've never been a fan of the "Robin Hood" theory of taxation, but since the government can't seem to curtail spending, it is inevitable. A financial transaction tax has the benefit of helping stop traders from churning the market.

What good will this do?

Right now the stock markets are highly manipulated by traders who make micro transactions to take advantage of the spread in prices. A financial transaction tax of 0.5% has already been enacted in Great Britain and one of 0.1% is in the works for the Euro Zone.

Will this really work in the U.S.?

If history is any indicator of the future, probably not. Likely there will be exemptions added for the large trading companies who actually churn the market, and the fee will be paid by individuals and be another drain on workers retirement accounts. But so be it, much like the Affordable Care Act, good intentions rarely seem to make their way all the way down to benefitting the public.

Then why are you still for this?

The benefits to taxpayers this bill proposes are well designed. I'm not so crazy about the paycheck bonus the bill is crafted around, but he addresses the need to make adjustments for two income households and redesign the Child and Dependent care credit so it actually will create a tax credit that helps working mothers keep their jobs and stay off the welfare system.

But isn't this another kind of welfare?

Tax credits are often referred to as welfare, but they have better intentions of getting people out into the workworld, rather than sitting at home. Personally, I think it is better to encourage people to make money, save and get independent than to sit at home wasting their lives away. But each is entitled to their own opinion on the subject.

Are there any other options?

There are always other options, but generally not ones that people like the idea of. Taxes are always going to be unpopular and most likely will be unfair once actually put into practice. But we should get used to the idea now and be prepared to make adjustments to our investment accounts before this type of legislation eventually comes into play.

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