Fact Sheet: Transaction Tax History
Proposed Securities Transaction Tax Is Far Greater Than Any in U.S. History
Proponents of a securities transaction tax dismiss concerns about the impact on the U.S. financial markets of a 25 basis point tax. They assert that the U.S. imposed such a tax from the mid-1930s to the mid-1960s at a higher rate with “no significant ill effects.”
The proponents are wrong. Not only was the previously applicable tax rate far lower, but the base to which it applied for most of its existence was different.
Current proposals would impose a transaction tax that is several times greater than any tax ever imposed in the U.S. on stock transfers.
Proponents of a transaction tax on stocks state that the U.S. instituted a tax of 20 basis points (0.2 percent) in 1914 and that the tax rate was more than doubled during the Great Depression.
- When instituted in 1914, the tax on stock transfers was imposed at a rate of 2 basis points (0.02 percent), not 20 basis points (0.2 percent).1 This rate remained unchanged until 1932.
- Between 1932 and 1958, this tax was imposed at rates that varied between 4 basis points (0.04 percent) to 6 basis points (0.06 percent).2
- In 1959, this tax rate returned to 4 basis points (0.04 percent),3 where it remained until it was repealed in 1965.4
- Thus, the 25-basis point (0.25 percent) tax rate included in current proposals is more than four times higher than the highest rate ever imposed on stock transfers, more than six times higher than the 4 basis point tax rate in effect from 1959 through 1965 (the only period during which the tax was applied, as in the current proposals, to market value), and more than 12 times higher than the rate in place from 1914 to 1932.
The current proposals would tax the market value of a stock transfer. When comparing their proposals to the tax in effect from 1914 to 1965, proponents do not discuss the base of the previous tax.
- Between 1914 and 1958, the tax was imposed on the par value, rather than the market value, of the stock.5
- Par value is a legal concept that bears no relation to market value.6 Typically, a stock’s par value is significantly lower than its market value; this has been the case since at least the mid-1950s.7
- In 1959, the tax was changed to apply to the market value of a transferred stock.8
- By the end of 1965—seven years after the tax base was changed from par value to market value—the tax was viewed by Congress as complicating securities transactions9 and repealed.10
- Today’s transaction tax proposals would apply the tax to the market value, rather than the par value, of a stock. Thus, the proposed tax is not comparable to the transaction tax in place in the U.S. between 1914 and 1958.
- The U.S. had a tax on the market value of a stock transaction for only seven years, from 1959 through 1965. The rate of that tax was 4 basis points—less than one-sixth of the 25 basis points in the current proposal.
- Even if a 4 basis point tax on market value were instituted now—i.e., even if the proposed tax were of similar magnitude to the tax that was in effect from 1959 through 1965—such a tax would have a much greater impact on investors’ costs, as overall transaction costs have declined markedly since 1965.
- U.S. history provides no lessons on how markets would react to a transaction tax of 25 basis points.
1 The tax applied to post-issuance stock transfers (such as stock exchange trades) at a rate of 2 cents for every $100 of par value (also known as “face value”). See Revenue Act of 1914, Pub. L. No. 63-217, Sched. A, 38 Stat. 745, 759-60 (1914). While all tax rate information provided in this Fact Sheet relates to post-issuance transactions involving stock, it should be noted that the highest rate of tax ever imposed in the U.S. on original stock issuances was 11 basis points. See Revenue Act of 1941, Pub. L. No. 77-250, § 521(a)(4), 55 Stat. 687, 707 (1941).
2 See 26 U.S.C. 902(b) (1932) (applying the stock transfer tax at a rate of either 4 or 5 cents per $100 of par value based upon the per-share value of the transferred stock); 26 U.S.C. 1802(b) (1941) (applying the stock transfer tax at a rate of either 5 or 6 cents per $100 of par value based upon the per-share value of the transferred stock).
3 The rate decrease became effective on January 1, 1959 (the first day of the first calendar quarter more than 60 days after Sept. 2, 1958). See Excise Tax Technical Changes Act of 1958, Pub. L. 85-859, § 141(a), 72 Stat. 1275, 1295 (1958).
4 Repeal was effective on January 1, 1966. See Excise Tax Reduction Act of 1965, Pub. L. No. 89-44, §§ 401, 701, 79 Stat. 136, 148, 157 (1965).
5 See, e.g., Revenue Act of 1914, Pub. L. No. 63-217, Sched. A. 38 Stat. at 759-60 (1914); Revenue Act of 1932, Pub. L. No. 72-154, § 723, 47 Stat. 169, 273 (1932); 26 U.S.C. 1802 (1941); 26 U.S.C. 4321 (1954).
6 See John Downes & Jordan Elliot Goodman, Barron’s Finance & Investment Handbook 483 (4th ed. 1995).
7 See Subcomm. on Excise Tax Technical and Administrative Problems, 84th Cong., Report to the H. Comm. on Ways and Means 44–45 (April 20, 1956).
8 See Excise Tax Technical Changes Act of 1958, Pub. L. 85-859, § 141(a), 72 Stat. 1275, 1295 (1958).
9 See H.R. Rep. No. 89-433, at 33 (1965); S. Rep. No. 89-324, at 38 (1965).
10 See note 4, supra.