As discussions about the federal budget abound, political pundits are wrongly seeking out new taxes. One misguided proposal is a U.S. financial transaction tax, which would likely apply to trading stocks, bonds, cryptocurrencies, and derivatives.
Taxing financial transactions is a partisan affair. Democrats and labor unions are the primary supporters of a financial transaction tax (FTT). Although a FTT is branded as a tax on the ultrawealthy, most Americans own stocks. According to Gallup, 61 percent of Americans own stocks. Notably, 63 percent of American households earning between $40,000 and $100,000 own stock as “an individual stock, a stock mutual fund, or in a self-directed 401(k) or IRA.”
Implementing a FTT would decimate American workers’ nest eggs. A study by the Modern Markets Initiative (MMI) finds that a “FTT could result in lost savings of $45,000 to $65,000 over the lifetime of a 401(k) account or the equivalent of delaying the average individual’s retirement by approximately two years.” That is a significant blow to American households looking for security after retirement.
Labor unions would benefit from a FTT because it would weaken returns for 401(k)s. Unions are fighting to protect defined benefit plans (e.g., pensions) while at the same time are admonishing defined contribution plans (e.g., 401(k) and 403(b) plans). Unions do not want American workers to be able to control and invest their own retirement money.
Enacting a FTT would violate President Biden’s pledge to not tax Americans making less than $400,000. Investors already have to pay an expense ratio for investing in index funds and mutual funds—adding a transaction tax would also scrape off a percentage of the returns investors would receive. The difference is an expense ratio is a fee a fund manager charges for providing the service of operating a fund, whereas a FTT takes money an investor would have earned and instead directs it to the government.
To add insult to injury, imposing a FTT would increase a “businesses’ cost of capital,” which would result in “fewer jobs as well as lower wages.” A FTT would ruin the American economy.
The FTT is not a new concept. From 1914 to 1965, the U.S. imposed a FTT that varied in size. In 1965, Congress repealed the FTT. Section 31 of the Securities Exchange Act of 1934 authorized the Securities and Exchange Commission (SEC) to charge a fee on stocks that would fund the agency. Other than the SEC funding tax, there is currently no FTT in the U.S.
European countries are embracing the FTT. Many countries implemented these taxes to raise revenue, but the taxes failed to raise as much as they thought it would. According to MMI, “in some countries like Italy and Sweden, the FTT only raised 3% to 15% of the annual expected revenue.” According to the Committee on Capital Markets Regulation, “FTTs would wreak havoc on financial markets and the broader macroeconomy – all without raising the expected tax revenue.”
A FTT reduces liquidity and depth in the capital markets. One paper explains how a FTT “lowers trading volume and welfare.” MMI also found that “other countries that have enacted a FTT noticed that 50% to 80% of trading went to other countries, the cost of trading went up, and the capital markets were negatively impacted.” A U.S. FTT would likely put U.S. stocks and bonds at a competitive disadvantage to other jurisdictions that do not impose the FTT.
A FTT would also make it more expensive for parents to save for their child’s education. 529 savings plans allow parents to set aside money in a tax-advantaged account that can be used to pay for their child’s K-12 education, apprenticeship, or college education. These plans invest in stocks and bonds, which would be affected by the FTT. In fact, the FTT “would negatively impact 529 College Savings Plan Portfolios across the country, with projected cost ranging from $2 million to $19 million for a plan portfolio with a size of $2 billion to $12 billion range, respectively.” The tax would be incredibly harmful to American families.
Embracing a FTT would negatively affect all American households that are either directly or indirectly invested in U.S. capital markets. Lawmakers should oppose any proposal to introduce a FTT. To embrace a FTT would be disastrous for every American and weaken the U.S. economy.
Bryan Bashur is the Director of Financial Policy at Americans for Tax Reform
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