Key Democratic lawmakers have revived a proposal to slap an excise tax on investors' sales of all securities held for fewer than two years.
The proposal was unveiled by Sen. Jeff Bingaman, D-N.M., last week. It would impose a 0.5% excise tax on the value of any security sold within two years after purchase.
A similar proposal, floated by Republican lawmakers five years ago, was squelched after it met stiff opposition from the Bush administration and Wall Street. The new version might be headed for a similar.
Mr. Bingaman's idea is to discourage short-term trading by large investors, leaving U.S. corporations free to make long-term investments in research and development, and training and educating their work forces. Those activities tend to drag a company's price down in the short term.
The excise tax would slide down from 0.5% on securities held less than six months to 0.12% on those held 18 to 24 months. There would be no excise tax on securities held longer than two years.
Mr. Bingaman's proposal would raise an estimated $27 billion to $62 billion a year to pay for a government program to help workers get higher education and new job skills.
It is one of a host of ideas floated by a Democratic task force appointed by Senate Minority Leader Tom Daschle, D-S.D., to examine ways to end middle-class anxiety over a potential loss of jobs and stagnant wages.
But President Clinton has not come out in support of the proposals by the task force. In fact, the administration condemned the excise tax idea as one that "would have severe negative consequences on global financial markets," said Calvin Mitchell, a Treasury Department spokesman.
The excise tax proposal also has been largely ignored by the securities and the mutual fund industries. But Marc Lackritz, president of the Securities Industry Association called it "a hidden tax" on American investments.
"Given the climate on the Hill and where the majority party is on this, we don't think its going anywhere," said James Spellman, an SIA spokesman in Washington.
An excise tax on securities ultimately could drive investors away from the stock markets, eventually hurting companies and causing a further hemorrhaging of jobs, money managers say.
"It's the capital flows which create jobs," said Stephen Smith, executive vice president at Brandywine Asset Management Inc., Wilmington, Del. "You don't want to do anything that impedes capital flows because capital is what creates jobs."
Moreover, any proposal that could spook the markets and push the economy over the edge would color the results of the November elections, said David B. Bostian Jr., chief economist and investment strategist at Herzog, Heine, Geduld Inc., New York.
Already, Wall Street, traditionally distrustful of Democrats, has reacted strongly to a Clinton administration effort late last year to clamp down on creative financing techniques.
One more "anti-Wall Street" proposal, such as the excise tax on short-term trading, could be "the straw that breaks the camel's back," Mr. Bostian said. "The goal is a noble one, but this is not the way to achieve it. This is not a time to be doing anything to scare Wall Street."
And far from arm-twisting investors into developing a long-term mentality, the proposal could achieve just the opposite effect. It could make the domestic capital markets less liquid, increase volatility and send U.S. investors rushing overseas, representatives of brokerage firms suggest.
"To encourage long-term investment is a desirable thing, but if you have to impose a tax to do it, then I think you're biting off your nose to spite your face," said Dennis P. Lynch, chief investment officer at Lynch & Mayer Inc., New York.
Moreover, any penalty on trading could hurt returns by institutional investors, including pension funds.
"It would raise the cost of our doing business," said Nancy Everett, managing director at the Virginia Retirement System, Richmond, which controls $20.9 billion in pension assets for state employees and pensioners.
The tax could be several times the cost of commissions (about 5 cents to 6 cents a share) and could give the pension plan pause in determining whether trading out of one stock into another would be profitable, she said.
"It would simply raise the hurdle," she said.
Charles Kadlec, managing director at J&W Seligman & Co., New York, said even though his large-capitalization growth fund usually invests in stocks that have a three-year horizon, it is still important to have the option to sell if something goes wrong.
"The fact that we own stocks on average three years doesn't mean we want to give up the option of letting go the stock," Mr. Kadlec said. With this proposal "we're more locked in."
Money managers agreed the proposed tax would scare investors away from cyclical, technology and other types of stocks and move more to larger, more established blue-chip stocks.
"The implication is that the tax would fall most heavily on the most vibrant part of the economy, which is new businesses," Mr. Kadlec said.
Investors would be less inclined to invest in equities, where there is greater opportunity to increase wealth over time, Mr. Kadlec added.
Others do not see the 0.5% tax as a large burden, considering the large capital gains tax investors must pay when they trade securities in less than a year.
"When you put it in perspective to what's already out there, it seems like it's more of a nuisance," said Catherine Rooney, vice president, Pitcairn Trust Co., Jenkintown, Pa.
"The systems to put in place to collect it might be expensive though."
Patricia B. Limbacher also contributed to this story.