What Investors Need to Know About the Financial Transaction Tax

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What's happening in the headlines can affect you as an investor. Here's what's going on, what you need to know, and what you should do.

The cold, hard facts
Reuters is reporting that two Democratic congressmen, Rep. Peter DeFazio and Sen. Tom Harkin, have each introduced a bill in their respective chambers that would impose a new tax on financial transactions. The percentage would be 0.03% and would apply to stock, bond, and derivative trades. If passed, the tax would take effect in 2013.

Some context
A financial transaction tax isn't a new idea. In recent years, similar bills have been introduced but haven't gotten anywhere. That's because the tax would hit high-frequency traders the hardest, which includes the likes of JPMorgan Chase (NYS: JPM) , Morgan Stanley (NYS: MS) , and Goldman Sachs (NYS: GS) , i.e., big investment banks that make a lot of money from high-frequency trading and have a lot of influence in Washington.

The theory behind the tax is, by penalizing the high-frequency traders, you remove trading volume and therefore some volatility from the market. DeFazio called high-frequency trading a "blight on the economy" and said the proposed tax is low enough that it would have little effect on traditional financial trading, aka what the individual investor does.

What it means for you
Debt-strapped governments around the world are desperately looking for new sources of revenue. A financial transaction tax is also a hot topic in Europe right now. But with a Republican-controlled House, and even a sitting president who has voiced opposition to such taxes in the past, it's unlikely this bill will get any traction.

Additionally, with the big-money investment banks certain to oppose this measure, you can rest assured that even this minuscule financial transaction tax won't make it through to you.

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At the time this article was published Fool contributor and newshound John Grgurich loves his Reuters feed so much he wants to marry it, but he owns no shares of any of the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a scintillating disclosure policy.

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