Much of the (reasoned) debate on turns on how to fund mandated coverage for those who can't afford it on their own. Suggestions have ranged from taxes on healthcare benefits to additional taxes on high-end sole proprietorships and highly-profitable S-corporations. A third option would be to follow the lead of Commonwealth countries and impose a federal tax on securities transactions. Done properly, a tax on arbitrage would go a long way toward funding universal healthcare without impacting most Americans.
Let's say we put a mill levy ($.001) on every security traded. In January the NYSE alone handled about 4 billion shares per day. Supposing that each share were only worth a dollar (the minimum value to be listed on the exchange), our tax would bring in four million dollars per day or $ 1 billion per year. Remember, we're talking about one exchange and the absolute minimum value for a stock for listing on that exchange. Extrapolate out our $ 1 billion figure to the other US exchanges using more realistic share values and to other types of securities (e.g., futures, derivatives, perhaps bonds) and we're talking some real money.
Moreover, this kind of taxation already exists in much of the world. They call it Stamp Duty in Commonwealth countries. Generally, the tax liability for the net amount of the transaction is born by the party selling the security.
Like the best taxes, a stamp duty falls most heavily on socially undesirable behaviors. Pension funds, the prototypical responsible investors, look for growth and dividend income over a longish time period. Thus, such investors will look for businesses with tangible products and sound management; e.g., utilities, manufacturing. This type of investor buys and holds and so would bear less of the burden of an arbitrage tax. Contrast the pension fund with a day trader who goes online, buys a stock in the morning, talks it up on a blog, and dumps it that afternoon. The day trader isn't concerned with the underlying, real value of the stock he buys but only how that stock is viewed by other investors. This is the kind of investor who creates bubbles, and this is the kind of investor who would take it in the shorts if we instituted a stamp duty. So an arbitrage tax makes good sense both in terms of raising revenue and in terms of structuring a stable economy.
Oh, and it won't hurt the little guy. Suppose somebody cashed in his $500,000 IRA. He'd be liable for 500 bucks. Even Joe the Plumber could afford it.