Peter DeFazio (D-OR) has introduced a bill to tax securities transactions to pay for TARP (HT: Doug Terry):

Congress finds the following:

(1) The Bush Administration allocated the first $350 billion of TARP funds in a manner that has outraged the Nation by failing to provide the most basic oversight of the funds.

(2) Congress has declined to block the remaining $350 billion of TARP funds despite the lack of oversight and the record fiscal year 2009 budget deficit estimated at $1.2 trillion.

(3) The Board of Governors of the Federal Reserve System has committed more than a trillion dollars to stabilize the economy by bailing out various banks deemed ‘too big to fail’.

(4) The $700 billion TARP fund and the new Federal Reserve lending facilities were created to protect Wall Street investors; therefore, the same Wall Street investors should pay for this infusion of taxpayer money.

(5) The easiest method to raise the money from Wall Street is a securities transfer tax, a tax that has a negligible impact on the average investor.

(6) This transfer tax would be on the sale and purchase of financial instruments such as stock, options, and futures. A quarter percent (0.25 percent) tax on financial transactions could raise approximately $150 billion a year.

(7) The United States had a transfer tax from 1914 to 1966. The Revenue Act of 1914 (Act of Oct. 22, 1914 (ch. 331, 38 Stat. 745)) levied a 0.2 percent tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help overcome the budgetary challenges during the Great Depression.

(8) All revenue generated by this transfer tax should be deposited in the general fund of the Treasury of the United States, scaled to meet the net cost of these bailouts, and phase out when the cost of the bailouts are repaid.

Doug’s thoughts:

The tax is going to be paid by the exchange, but who will bear the cost?  The exchange will raise the transaction costs to the participants to offset the tax and may eat a bit.
 
For the market participants, there may be a slightly higher price to do business, higher bid/offer spread, as sellers, market makers, try to offset some of these new costs.  As costs go up people will be less inclined to invest.  This is the classic elasticity argument of supply and demand and will determine who will eat the majority of the tax.  My belief is that neither is entirely elastic or inelastic.  People will still invest though slightly less than before as costs rise slightly.  Market makers will still supply the market, though some will go out of business.  The reality is that the bid offer spread is not decreasing, as most stocks trade in 1 penny increments already so the market maker will attempt to pass these costs entirely to the investor.  How successful he will be is another story.  The investor in the end will pay more than 50% of this tax and volume will decrease.
 
If passed, it seems to me that retirement funds and private investors will be incurring a large majority of the cost of TARP.  Liquidity providers, market makers, will incur some too and exchanges a small amount.  None of these parties were complicit in this debacle, but are certainly paying for it.  Thanks A lot Uncle Sam!