The Commodity Markets have an Elephant in the Room: Financial Transaction Tax

Published in: DeCarley Trading Press

As the election cycle heats up, like clockwork, talk of a financial transaction tax comes into the conversation. A decade ago, it was a fringe idea but in today’s environment, it is a mainstream solution to the government funding shortfall (I am using the term solution loosely). In other words, you could say things are starting to get serious.

Before an intelligent conversation can be had about the financial tax and the commodity industry, we would need to know the details. Obviously, those are few and far between. Thus, any preparation or guesses at the effects of the financial transaction tax are merely academic exercises at this point. The proposed rates range between 0.5% to 0.005% for stocks, bonds, and derivatives. Assuming a 0.1% rate for all financial transactions, investors buying $100,000 worth of stocks or bonds would pay a tax of $100 in addition to the traditional transaction costs. For a long-term investor, this would more annoying but probably not considered a deal-breaker. Although, a wonderful CNBC article was written by Greg Iacurci recently noting the Vanguard Group estimation that “every day Americans” could be forced to work an average of two and a half years longer to make up the shortfall caused by the tax in their retirement accounts. Nevertheless, if you apply the .1% tax to derivatives, namely options and futures, it is a game-changer (and that is an understatement). Let me explain.