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Robin Hood Tax

A difficult birth.

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Tobin Killer

Whoever thinks that this is a good idea obviously doesn't make their money day trading.

Consider the following:

I'm a Forex Currency investor. The service I provide as a speculator in the currency markets is to ensure that when Ford wants to bring 896M Euros ($700M in US dollars) in profits back home to the US after they sell cars in Europe, they can do so without having the exchange rate cause them to loose 2% or more of that profit simply because they need to sell their Euros and buy the Dollars they need to pay their tax bill. (You know..the one that's rather high since we have the HIGHEST corporate tax rate in the world?!?!)

You see, the guy they need to buy the dollars from sees Ford coming from a mile away and says, "Hey, that's a lot of Euros you need to sell. I know the going rate is 1.30 Euros for every Dollar, but because you want to exchange so much, you're going to have to take a 2% hit in order to get the money back into the US today so you can pay them there high taxes and all that."

As a speculator, I provide the "grease" that allows such transactions happen without the companies that worked so hard (and employed so many people) having to take a significant loss that would be equal to a major middle management screw-up simply because they need to bring some money home. Now that we understand the necessity of speculators in the currency market, let's consider the rest of this...

As a currency trader, I buy currency pairs on margin anticipating the exchange rate to rise or fall based on various fundamental and technical factors. So if I buy 1 standard "lot" of the Euro/UsDollar pair, then I'm anticipating that the Euro will rise in value against the dollar. If I sell that same pair short, then I am anticipating that the dollar is rising in value compared to the Euro. Doesn't really matter which side you're on as you're just betting, in essence, that one economy is going to become stronger as compared to the other. As long as I (and a couple million other people like me) keep the money going in and out of the system, there will be enough "grease" to allow Ford to bring it's profits home without significant loss so they can help fund Obamacare.

I'm sure that anyone would agree that if I had a $2,000 account I should be able to risk 5% of that or $100 on a single trade. I'm not betting the farm or anything.

If my plan is to set my Stop Loss at 10 pips and set my eyes on a Take Profit of 2x that amount (20 pips) then, I'm willing to risk $100 in order to try and earn $200. The mechanics of this are not so obvious though.

In order to be able to risk $100 over just 10 pips and try to make $200 over 20 pips, I need to buy 1 standard "lot" of the Eur/USDollar pair. One Lot is $100,000. My 200:1 leverage allows me to do this.

The broker COST (in addition to the risk) for me to do this is equal to the spread plus the commission. The spread is usually 1/2 of 1 pip or about $5.00 and the commission is about $6.00 for both sides for a total of $11.00 cost just to make the ATTEMPT to earn some money doing this rather risky activity. Remember...nobody is going to bail me out if I fail....there won't even be any unemployment there to help someone like me out if things go bad. I'm all alone on this with a wife and three kids to feed.

Now lets consider what this silly .05% "Tobin" tax would do to these costs. I mean, it's just a really small tax right? I mean...you're only risking $50 and .05% of $50 is just 2.5 cents...right?

WRONG!

The .05% would be levied against the entire "standard lot" in the transaction. So take that nice .05% and multiply it against the $100,000 position needed in order to risk that $100 over 10 pips and you find that the tax on JUST THIS ONE TRADE is $50.00!!!!

That's right boy's n' girls...I'd have to pay $50 in tax in the event that I won OR lost. If I won, then that's 25% of my profit and that's not even including the broker fee of $11. So now it cost me $61 when I win $200 leaving me with $139 in profit.

Oh wait! That's only if i WIN! When I lose I take the $100 loss in capital PLUS the $61 in tax/commission for a total loss of $161.

I'm sure you might say, "Hey...you just won $161 for doing nothing but sitting at a computer. Cry me a river!" But wait....did I mention that ALL systems which have a Take Profit target that is 2x risk is ALWAYS lower than 50%? That's right...you lose more often than you win. In fact, I have times ever MONTH where I lose 10, 11, or 12 times in a ROW! I'm still profitable...but some months I barely break even. If the Tobin tax was included...I'd NEVER have a profitable month.

People are not thinking this through. You know that Sweden already tried this once? It destroyed their bond market in a matter of DAYS and even though they revoked the plan once it became glaringly clear that it was a disaster, it took the country nearly 10 years to recover from it. Anyone who wants to see a tax added to each and every investment transaction is really hoping to take our economy out of the frying pan and into the fire....but of course they think that such will be our salvation. This is classical self-destructive thinking.

Here's the link to an explanation of Sweden's history with the Tobin tax: http://en.wikipedia.org/wiki/Tobin_tax#Sweden.27s_experience_with_financial_transaction_taxes

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