It’s safe to say that Treasury Secretary Tim Geithner has a lot on his plate. Between debating the finer points of market segmentation and looking for a solution to the United States’ stagnant economy, he has about 1000 protesters showing up in his driveway.

On May 20, about 1000 protesters showed up on Geithner’s driveway carrying picket signs and bullhorns. The protesters were asking for three things:

  • A financial transactions tax
  • Principal reductions for underwater homeowners
  • An investigation into the bankers who caused the current financial crisis

According to an article on The Huffington Post, the financial transactions tax for which the protesters were lobbying would be a 0.03 percent tax and would raise about $350 billion over the next nine years.

The idea of such a tax is to create some responsibility for specific types of risky financial decisions, like the ones that JPMorgan engaged in and led to a $3 billion loss. United States senator Jim DeFazio, Bill Gates and former U.K. Prime Minister Gordon Brown have heavily advocated this type of tax.

In Sept. 2011, the European Union approved a similar tax that is expected to raise about $78 billion annually. The proposal taxes trading of stocks and bonds at 0.1 percent and derivatives contracts at 0.01 percent.

The concern with financial transaction taxes is that it will weaken banks’ lending ability during times of weak economic growth. This is an especially sensitive subject right now because the United States economy has been caught in a weak economic state since the Great Recession began in 2008.

In response to outcries from the public, the White House has revived the discussion around a “Financial Crisis Responsibility Fee.” Instead of applying to all risky transactions made by all banks, this type of fee would apply only to the biggest banks making the riskiest transactions. In this way, the White House argues that it directly targets those who are responsible for the financial crisis of the early 00s.

The question small businesses might be concerned with is: what effects will this have on interest rates? Launching a startup is no simple task and if you need to borrow money from a bank to make it happen, you’re probably keeping a close eye on long and short-term rates.

Market segmentation theory states that there is no relationship between long and short-rates and that the two rates create two different markets. When you’re trying to decipher the effect that a financial transaction tax would have on the loan you’re applying for or the securities you have invested in, you need to ask whether your investment is long or short-term.

According to a fact sheet looking into the European Commission that proposed a financial transaction tax in 2011, the effects of the tax would be two-fold and, not surprisingly, the two sides affected are the two side delineated by market segmentation theory: long and short-term investors.

According to the fact sheet, those who invest in long-term assets would benefit from a more stable economy and would hardly notice the tax because long-term asset holders tend to trade less frequently. On the other side, those who are looking to take advantage of short-term market fluctuations – like those who created the financial crises of the early 2000s – would be affected because each transaction would be taxed.

Geithner remains opposed to the financial transaction tax and is likely to remain so as long as the Invesment Company Institute, U.S. Chamber of Commerce and other prominent financial organizations continue lobbying against it. While it is unlikely that the law will get passed under his watch, it will be interesting to see what alternatives the Treasury Secretary comes up with.