How About Taxing Those Gamblers on Wall Street?

As the long bull market passes through its death gyrations, there are still opportunities for many Americans to come out ahead. This is probably not the time to be looking for the next Microsoft, Intel or Cisco. While it may prove profitable, most will not have the stomach for selling short, betting on a continued downturn in the market. But there is one Wall Street strategy that can still yield big gains: taxes.

Before rushing for a gun, consider how gambling is treated in this country. Gamblers who place their bets on horses at the race track will be taxed anywhere from 6% to 12%. The same applies to people who bet in Las Vegas, Atlantic City or any of the other gambling havens that have sprung up over the past two decades. The tens of millions of people who gamble on state lotteries can expect their tickets to be taxed at least 20% and in some cases as much as 40%.

It is important to realize that these tax rates are not on the winnings. The winners of the big jackpot in the state lottery will still pay income tax on the prize. These tax rates are what the government takes from people just for playing. For example, in the case of state lotteries, 20% to 40% of the ticket money is pulled out of the pool before the big winners get their hands on the pot. In short, most forms of gambling in this country are heavily taxed.

The one exception is gambling on the stock market. Day traders can buy and sell stock by the hour--or the minute--without paying any tax on their bets. This is hard to justify. Why should firefighters, waitresses or cashiers pay a 30% tax if they bet on lottery tickets, while day traders who speculate in Internet stocks place their bets tax-free? Since the people who bet on Wall Street are likely to have much higher incomes than those who bet on the lotteries and race tracks, this looks like just one more case where the people on top get a break.

Of course, most people who buy stock don’t think of themselves as gamblers or speculators. They view it as a way to save for the long term--to pay for their kids’ education or their own retirement. These people would not have much to fear from a tax on stock market gambling. A modest tax of one-quarter of 1% on the sale or purchase of a share of stock--a quarter on a $100 purchase--would make very little difference to someone who holds a stock for eight or 10 years.

But this tax would make a big difference to the high rollers who are buying and selling stock by the day or the hour. And there are many such people; the average share of stock on the NASDAQ was held for less than six months last year. These short-term traders would be required to pay a tax on their bets, just like other gamblers.

And the tax would raise a great deal of money. My estimates indicate that a modest tax applied to stock trades, along with other forms of financial speculation such as options, futures and currencies, could easily raise $100 billion a year--enough to finance a Medicare prescription drug benefit similar to that proposed by Vice President Al Gore and to pay for the middle-class portion of President Bush’s tax cut. In short, the money that could be raised by taxing Wall Street gambling could provide real gains for tens of millions of people.

Of course, taxing Wall Street gambling will not be an easy sell in Washington. The big losers would be the folks that run the brokerage houses and banking industry. And we all know that these are big sources of campaign contributions for politicians. But there are far more people who stand to win by taxing Wall Street wagers. In a democracy, this has to count for something.