Markets In Your Community

Four Reasons A Sales Tax on Investors is a Bad Idea

Sen. Bernie Sanders, the independent socialist of Vermont who made a spirited primary run for the Democratic presidential nomination, has had a lot to say about Wall Street. But one of the worst proposals to come out of his campaign is not a new one: a financial transactions tax (FTT). It’s time to bury this bad idea once and for all.

Sen. Sanders emerged as its foremost champion, introducing legislation in the Senate to impose federal taxes on stock transactions (0.5%), fixed income investments (0.1%), and derivative contracts (0.005%), and made it a centerpiece of his campaign platform. Sen. Sander’s proposal is included in S. 1373College for All Act,” where the proposed FTT would be used to generate funds to offset the cost of the Department of Education awarding grants to states to eliminate tuition and required fees at public institutions of higher education. Other members of Congress, including Rep. Peter DeFazio (D, OR),  have introduced separate but equally misguided FTT proposals.

The FTT’s supporters promote the tax as a way to “curb speculation” among market traders, while supposedly generating hundreds of billions in new revenue for the government.

If you think that sounds too good to be true, you’re right. Proponents would have us believe that taxing financial transactions will open up a magic pot of money, while having no larger repercussions for the economy. In reality, however, the FTT would be highly unlikely to deliver on its promises if implemented, while bringing numerous unintended consequences.

The FTT would have negative impacts on both investors and businesses, while reducing economic growth for everyone. Here’s why:

  • An investing sales tax means higher costs for you. FTT proponents claim the tax will only land on “the rich.” But in reality, it will essentially work as a sales tax on investing-which raises costs for everyone in the market. A transaction tax on trades will be passed on to all investors. If you have a 401(k) account, IRA, pension account or mutual fund holdings, prepare to see your returns lowered as costs increase, thanks to the new tax.
  • It discriminates against asset classes. By imposing higher taxes on some types of asset trades (particularly equities) as opposed to others, the tax will serve to distort investor decision-making and activity. This would seriously distort capital flows and market efficiency.
  • It will reduce trading volume-and that’s not a good thing. FTT proponents say one of their goals is to clamp down on “speculation” in the market, which they claim is not productive. But it’s notoriously difficult to determine exactly what constitutes “productive” versus “nonproductive” trading. Short-term traders, the so-called “speculators” who are much maligned by politicians, often play a vital role in spotting opportunities and inefficiencies in assets they believe to be under- or over-valued. Moreover, greater trading volumes mean greater efficiency, better pricing information over time, and greater liquidity-all of which serve to foster economic growth and job creation in the larger economy.
  • Worst of all, it won’t raise the tax revenue they promise. The above failings might be overlooked if the FTT were to lead to new streams of revenue that could fund important public priorities. But as economist Tim Worstall writes at Forbes, that probably won’t happen.

“There’s one really serious problem with such an FTT: it won’t actually raise any revenue,” Worstall writes. “In fact, it will reduce total tax revenue. And if we’re going to be honest about it a new tax that actually loses the government money just doesn’t sound like a very good idea.”

The nonpartisan Tax Foundation found that when Sweden imposed an FTT, tax revenues actually declined. Why? Because when the new tax reduced trading volume, that meant fewer taxable events to generate revenue, the Tax Foundation’s Kyle Pomerleau explains:

“Not only did this push down the amount of revenue the transaction tax itself raised, revenue from the capital gains tax also declines. As a result, overall tax revenue in Sweden declined. According to the same study: ‘the capital gains tax revenue fell so much in response to lower levels of trading that transaction tax revenues were entirely offset’.

“A financial transaction tax would result in lower levels of trade volume in the United States and with the damage it would do, it would end up raising less overall revenue for the federal government than the Senator expects. In no way does a financial transaction tax represent good tax policy.”

It’s not at all clear why anyone would seek out a new tax that won’t even generate net revenues-and may end up being more costly. It suggests that the true intent behind the FTT is to “punish” the financial industry and investors, rather than to achieve any broader positive purpose. That’s a flimsy basis for a tax policy.

Taken together, these arguments against the FTT show the new tax could ultimately harm economic growth and job creation. Other nations that have gone down the FTT path have discovered the stark realities of the negative impact of implementing an FTT to their regret; there’s no need for the U.S. to follow their misguided lead. Experience has shown that the economy would shrink, by raising the cost of capital, with the implementation of an FTT.

While Sen. Sanders presidential campaign did not lead to his assuming the Democrat party nomination, the campaign did provide him an increased leadership voice in advocating Democratic policies. Unfortunately, Sen. Sanders is not alone pushing the idea of an FTT. Here’s hoping that they learn the facts about this wrongheaded idea, and lays the FTT fantasy to rest once and for all.

More on why proposals for a financial transactions tax are wrong-headed