Why A Financial Transaction Tax Would Destroy Retail Traders

Democratic presidential candidates, including Joe Biden, Elizabeth Warren and Bernie Sanders, have proposed a new tax on financial transactions. While candidates argue these new taxes could help pay for ambitious healthcare programs that could benefit the middle class, critics say they would suffocate retail stock traders.

Financial Transaction Tax Explained

Warren has said her 0.1% tax on sales of stocks, bonds and derivatives could raise $800 billion in revenue over a decade. Sanders is proposing an even more aggressive 0.5% tax on stock trades 0.1% tax on bond trades and 0.005% tax on derivative trades. This week, Biden said he would support new taxes on financial transactions.

On Friday’s PreMarket Prep, co-host Dennis Dick said these new financial transaction taxes would be bad news for the average trader.

“This financial transaction tax is still scaring the hell out of me,” Dick said. “If you’re a trader, you have to think twice about voting Democrat right now. I’m not saying Trump or no Trump. But if you trade stocks, and they put a financial transaction tax in, this is directly going to impact you.”

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The End Of Day Trading?

Dick said even the conservative 0.1% tax rate would mean each $10,000 trade would come with a $10 tax bill. Dick said these taxes could end up being more expensive for traders than the trading commissions that most online brokers recently eliminated.

“I would hope that this would not get through the House, and I would hope that this would not get approved. But it is scary and would put a lot of traders out of business,” he said.

“I think day traders are done if they put that financial transaction tax in…They are basically saying, 'day traders, we don’t want you in the market.'”

Long-term investors would feel the impact as well.

“Every time your mutual fund makes a trade, it’s going to be 0.1% off the top,” Dick said.

In addition, while most investors are not day traders, Dick said day trading provides much-needed liquidity in the market that helps reduce risk.

Benzinga’s Take

Assuming Republicans maintain control of the Senate in 2020, it’s unlikely any Democrat would be able to push any of the current financial transaction tax proposals through Congress.

Democrats’ chances of taking back the White House may be an uphill climb given Friday’s November jobs report shows a booming economy and an unemployment rate at a 50-year low.

Listen to the full discussion on the financial transaction tax at 47:07 in the podcast below, or watch the clip on Youtube here.

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google Play, Soundcloud, Stitcher and Tunein.