Talk about tax reform is heating up on Wall Street, in Washington and in the homes of millions of Americans.
Previously passed payroll tax cuts deliver about $1,000 extra into the pockets of working families but are set to expire at year’s end. To balance the federal budget and address income inequality, some legislators are favoring a so-called “millionaire’s tax” on the wealthiest Americans. President Barack Obama and prospective Republican nominees for the 2012 ballot are all wrapped up in the idea of reforming the tax code to boost the economy and help small businesses.
Unfortunately, if the debt crisis across the Atlantic is preface to our own budget and tax woes in the U.S., the next chapter might involve taxes on investing income. That could seriously damage the performance of the stock market, individual retirement portfolios and the profits regular retail investors can hope to take home from their trading.
The so-called “Robin Hood tax” is a levy on trades in the financial markets — on stocks, bonds and other such transactions. It was formed out of a need for tax revenue but also a lot of ill will toward big, bad banks.
The idea is not limited to Europe, either. None other than Microsoft (NASDAQ:MSFT) founder Bill Gates pitched such an idea at the recent G-20 meeting, proposing a “modest tax” on trades of stocks and bonds to generate $48 billion or more annually from the G-20 countries.
That’s all well and good for Bill Gates, filthy rich though he may be. For those of us who simply are trying to tap into the financial markets to plan for our retirement or our children’s education, the plan seems awfully misguided. Whatever name you give such a tax, it’s hardly robbing from the rich to give to the poor.
It’s robbing regular Americans and putting their retirement at risk.
The Market Is for Everyone, Not Just the Wealthy
Let’s be clear: Investing is not just a country pastime for CEOs. It’s a painfully pedestrian way for average Americans plan for their financial future. Younger generations have all but resigned themselves to the fact that Social Security will disappear, and that it is up to us to provide for our retirement — via the stock market, our 401(k) accounts and similar means.
Government will not provide for us, so we need the markets to provide for ourselves.
For older investors, let’s also not forget that there’s already a boatload of “cash on the sidelines” as investors sit out the stock market, waiting for confirmation that the economy is moving in the right direction and that investing is a wise move. Erecting more barriers to that capital will not just keep traders out of the market, but will cause stocks to languish at current valuations thanks to a lack of volume and buying pressure.
That’s bad news for the people who already have their money in 401(k) accounts and IRAs, hoping and praying their cash won’t evaporate by the time they need it.
The Middle Class Deserves to Trade
We are a long way from any formal tax proposals, and you can be sure lawmakers would try to shelter most middle-class families and 401(k) plans from direct exposure to any Robin Hood tax. But let’s get real — 401(k) accounts offered by many employers have very limited options, and the fund administrator has all the power. What’s more, many active mutual fund managers can’t even beat their benchmarked indices.
So why do we want to discourage investing options for small, individual investors? We should be doing more to open up investing access to normal Americans, not making it harder.
The idea that only fat cats at investment banks trade stocks is naïve — and commonly an excuse for people too lazy to take control of their financial future. Online brokerage platforms and smartphone apps allow regular Joes to trade stocks with ease and flexibility — even while at their day job. Sites like InvestorPlace.com and cable news networks provide a host of free information and — hopefully — insight into the opportunity and risks of the markets.
The playing field is more level than ever before. Now Europe wants to take a step back, and possibly prompt similar action in America? That is a big mistake.
Stock Options Are Just Rewards
Sure, there are some CEOs out there who want taxes to stay small so they can keep more of their cash. Oracle (NASDAQ:ORCL) CEO Larry Ellison owns 1.1 billion shares (yes, that’s billion with a B) worth almost $35 billion right now — so a few percent off the top means a lot to him.
However, let’s acknowledge that stock options are perhaps the only just compensation for many top executives. What would you rather have — golden parachutes and guaranteed money? The early frontrunner for the “Soulless Bank of the Century” award, Bank of America (NYSE:BAC), managed to offer a nice parting gift to CEO Ken Lewis after the financial crisis. Lewis never has faced criminal charges or jail time, and waved goodbye with a jaw-dropping $125 million severance package.
I don’t know about you, but I would have much preferred him holding onto 10 million Bank of America shares. Maybe then he would have blinked as BAC shares tumbled from $40 apiece to bottom out at less than $4 in early 2009, since he had skin in the game.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.