Wall street sales tax?
March 14, 2012 7:44 AM   Subscribe

Have securities (stocks, bonds, etc.) ever been treated the same as physical goods in terms of buying and selling them? I am specifically thinking of sales taxes, but knowing about other aspects is welcome as well.

This question came from a comment I made here where I half joked about applying Herman Cain's 9/9/9 sales tax idea to stocks, bonds, etc.

Follow up: why is the purchase of securities treated as different than the purchase of physical goods? Was there a difference from the beginning, or were they ever considered similar/the same?
posted by Hactar to Law & Government (9 answers total) 1 user marked this as a favorite
They aren't really wrt to Sales Tax/VAT. If you purchase a physical good for onward sale rather than consumption you don't pay sales tax. You just can't consume a security. You do pay tax on the income a security produces - at a higher rate than sales taxes in the US at least.

The better question is why are personal capital gains tax rates different from ordinary income in most countries. I don't have an "Answer" for that.

Also some countries used to levy a duty on share purchases. The problem was its too easy to evade those duties, so they just sort of went away.
posted by JPD at 7:52 AM on March 14, 2012 [1 favorite]

Remember--you don't pay sales tax--the seller does. They pass it on. It is the tax for selling a certain class of goods at retail. Securities are not sold at retail.
posted by Ironmouth at 7:54 AM on March 14, 2012

Financial transaction taxes have been used in a variety of times and places.
posted by mullacc at 8:11 AM on March 14, 2012 [1 favorite]

Originally, the first securities (bonds, annuities, etc) were issued by governments, so taxes weren't needed because it was already raising money.

In the 16th or so century, some Italian city-states actually taxed their richest citizens by requiring them to buy bonds rather than pay taxes outright.
posted by Jon_Evil at 8:29 AM on March 14, 2012

Equity (stocks) are taxed on dividends and in gains from sales. Additionally, the equity owner participates in the company's corporate taxes.

Debt (bond) owners pay taxes on dividends and capital gains as well with the exception of munis which are to the benefit of the issuing organization as much as the purchaser.

Various excess transaction taxes have been attempted on top of those. Additionally, corporate taxes paid by exchanges, specialists etc. indirectly increase the cost of trading.
posted by michaelh at 8:53 AM on March 14, 2012

why is the purchase of securities treated as different than the purchase of physical goods?

A few reasons. First, common law jurisdictions have always had a fairly sophisticated system for dealing with various species of property. There's the real/personal distinction, of course, but the number of different kinds of theft for which there were common law causes of action is quite impressive.* But the key is that while physical goods are what they are in and of themselves, as far as that's possible, securities have value only in so far as the legal system says they do. I'm not talking about the difference between "inherent" and "market" values, but the fact that with a physical good, even if you can't sell it, is still at least theoretically useful as a discrete physical object. A security, on the other hand, is an abstraction, something which only has meaning, let alone value, because people with authority say it does. So that, right there, is a justification for treating securities and physical goods as different sorts of things: they are different sorts of things.

Further, securities are really just the transfer of money. They don't represent a good one can do anything with. They may be useful for the getting of more money, but you can't eat them or build anything out of them. One might similarly ask why we don't tax check transactions or ATM withdrawals. They're the same sort of thing.

This is not to say that financial transactions aren't taxed. They are. Every time you pay your insurance premium, a certain amount of that is a tax. But it's not a "sales tax," as such anyway, though it can look that way to the consumer. And while securities themselves are not necessarily taxed directly, the income they produce is. So while you may not pay any taxes when you acquire your stock, you will pay taxes on any dividends it generates and on the capital gain you realize from selling it.

Ultimately though, securities look a whole lot more like a service than a commodity. Services are sometimes taxed, though they're conceptually distinct from physical goods in both their nature and their cost structure, so it makes sense that they should be taxed differently. As adding a tax on transactions, as such, would radically decrease the number of transactions, most governments tend to try to capture revenue in other ways.

*And one of the reasons the Federal Rules punted on that in favor of a single cause of action, the civil action.
posted by valkyryn at 8:57 AM on March 14, 2012 [4 favorites]

You might need to think/do some research about the various kinds of taxes you have in mind. They tend to look the same to the victim but the basis varies quite a lot. A stamp duty is a tax on the instrument that effects a transaction, assessed by reference to the value of the transaction. The UK used to charge "stamp duty" on a transfer of real estate--same in Oz. Back in the day, I presented many, many real estate contracts to the Deputy Commissioner's office for stamping. Now what looks like the same tax is "property transfer tax" and it's formally imposed on the transaction itself rather than on the instrument. I assume it applies to transactions in securities, but there has to be a "property" being transferred. (I bet there are plenty of schemes out there for doing what looks like a transfer without actually transferring anything--contracts for difference spring to mind.)
The EU's proposed financial transaction tax looks like it would work in much the same way. Now, back when there were stamp duties on real estate transactions there were also stamp duties on at least some transactions in securities.

VAT (or GST in Australia or Canada) is a different creature. VAT is charged on the value added. If a supplier adds value he/she charges the recipient a percentage of the value of the supplied goods or services,and must pay that to the tax man less any VAT he/she has paid, so the tax man ends up getting the relevant percentage of the total addition of value. It looks to the consumer like a sales tax but it's not. In Oz it's actually illegal to advertise the price of something without including the GST; don't know about Canada.
A historical example of the fun that can be had with taxes on goods comes from the fiscal history of Australia. In Oz there are no state income taxes, and the Australian constitution prohibits the states from imposing "duties of excise". Unfortunately the framers thought everyone knew what an excise was. The states, searching round for ways of getting worthwhile amounts of revenue, hit on the idea of imposing a tax on liquor licences, assessed (naturally) according to a licensee's sales. This of course ran straight into the prohibition on excise. The next step was the idea of making the levy depend not on sales but on purchases. I think the High Court upheld this one, but any time the state treasurers tried a new scheme to tax some sin (booze, cigarettes, whatever) or other it was very likely to get challenged as an excise.
posted by Logophiliac at 9:17 AM on March 14, 2012

Wow, thank you guys. I feel enlightened. And boggled. Although I think I just passed the edge of the Dunning-Kruger effect for this sort of thing.
posted by Hactar at 9:25 AM on March 14, 2012

To add to valkyryn's excellent answer, the distinction is between a chattel and a chose in action.
posted by Dasein at 11:57 AM on March 14, 2012

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