Retirement savers, small scale investors and startups: These are the people who stand to lose the most with a Financial Transactions Tax. The tax would directly reduce household savings for retirement and education, shut off a proven avenue of building financial security for young Americans and disrupt American markets.
Ostensibly aiming to penalize banks and high-frequency traders, the tax that appears in Sen. Elizabeth Warren’s and nearly every Democrat’s platform would damage individuals far beyond Wall Street and would not come close to paying for “free college,” either.
Bernie Sanders’ Inclusive Prosperity Act of 2019 would impose a tax of 0.1 percent-0.5 percent on financial transactions of stocks and bonds. His version of the FTT would effectively skim from the 3.5 billion average daily transactions on the New York Stock Exchange alone, the largest marketplace for stock trading, and cost investors anywhere between $776 billion and $2.2 trillion over 10 years. This disparity demonstrates the difficulty of quantifying a tax on the economy and personal savings accounts.
Retirees would have $20,000 less in their IRA or 401(k) accounts by retirement as a result of the tax, according to estimates from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. The consequences of this are dire, as estimates suggest the average investor would have to continue working two-and-a-half years longer to make up the difference.
The tax would hit retirement savers hard. Financial Transactions Tax proponents insist it would “reduce inequality.” One group argues the tax burden will only be felt by investors wealthy enough to bear it and will reduce inequality by “reining in” the growth of the financial sector which accounts for 7 percent of U.S. GDP. The group celebrates weakening these channels of prosperity through the FTT as a step toward equality because it claims, “financial assets like stocks, bonds, and derivatives are so concentrated in the hands of the wealthiest Americans.” But pulling down an industry that provides financial services to the rest of the economy does nothing to help low income households, whereas having access to loans and capital markets, or a chance to build wealth through low risk investing would indeed help.
Retirement account holders are not the only ones caught in the crossfire. Millennials interested in expanding their savings also stand to lose through this tax. Today, millennials using microinvesting apps like Robinhood to build wealth through the stock market benefit from minimal trading costs and low barriers to entry that microinvesting pioneered and established banks have mimicked. With 6 million accounts, Robin Hood’s mission is to use the stock market to “shrink the gap between the ‘haves’ and the ‘have nots.’”
The real way to help people is to widen access to the stock market to elevate all participants. A crucial step toward creating wider opportunity is to remove barriers to investing, not impose more.
Direct costs on individual returns are not the only way a Financial Transactions Tax would undercut this vehicle of mobility, either. The tax will harm economic growth and increase the cost of borrowing, suppressing the value of companies. The tax has been tried before, when the U.S. taxed financial transactions from 1914 to 1965. After it was repealed, the Chamber notes trading volume on the NYSE increased by an incredible 33 percent from in 1966–67.
When proponents argue the tax would not hurt American markets because European and Asian markets tax these transactions, they fail to see America’s advantage as the cheapest place to trade is what makes it the leading country for investment in the world. Congressman Patrick McHenry, North Carolina Republican and ranking member on the House Financial Services Committee, recently expressed his concerns in a letter to Treasury Secretary Steven Mnuchin that business may shift to Hong Kong or Chinese exchanges and asked the Treasury to study the effects of the tax.
The Chamber’s study also highlights the U.S. Interest Equalization Tax of 1963, which taxed foreign stocks and bonds at 15 percent, adding costs that pushed much of the bond market to London and created a European bond market that stuck around even after Congress repealed the tax in 1974. If the U.S. cedes its competitive advantage again, history shows capital is bound to stream out of the country. It may never come back.
By weakening one of the strongest levers of economic mobility, politicians pushing the FTT will hurt precisely the households they claim to care about.
• Ryan Goff is federal affairs associate with the Shareholder Advocacy Forum, a project of Americans for Tax Reform.