How a tax on financial transactions would simply hurt the middle class
As the presidential campaign heats up, candidates are proposing more policies to address issues from climate change to student debt to health care. Many of those programs come at a substantial cost. These ideas must also come with ways to pay for them. A few proposals have been floated around a financial transaction tax with shocking numbers. But the reality unfortunately does not meet the rhetoric. It is a tax on Main Street savers and retirees that would end up costing more than it would raise.
A financial transaction tax is a tax every time a stock, bond, or future is bought or sold. If you are an individual investor, you would be taxed every time you buy or sell company shares, mutual fund shares, or government bonds. A financial transaction tax would hurt everyday investors the most. These are the people saving for retirement, invested in pensions, or trying to pay college tuition for their kids. Those workers with 401(k) plans would have to pay a tax every time the fund buys or sells any stocks or bonds.
This would slowly eat into their total retirement savings. Under one of the recent proposals, a typical retirement investor will end up with 8 percent less in their 401(k) or individual retirement account over their lifetime, so that means they would have $20,000 less at retirement as a result of this tax. Those with pensions would also be affected. Defined benefit plans are already under major pressure to meet obligations to plan participants, and a financial transaction tax would eat into these plan investments as well. A financial transaction tax would also make it more expensive for businesses to raise additional capital, harming their ability to grow and create jobs.
Talk about unintended consequences. This tax is not a new revolutionary idea. It is an old one and a bad one. Germany once had a small financial transaction tax paid by residents, however, it was later abolished in 1991. Sweden imposed a financial transaction tax of 1 percent in 1984. Share prices fell more than 5 percent in the month leading up to and including the date of the announcement. The volume on the Swedish stock market plummeted with half of the business going to London. Sweden repealed its transaction tax in 1991, but its stock market never really recovered.
In the United States, we imposed a transaction tax in 1914. It was then unwisely doubled during the height of the Great Depression in 1932, sending the stock market to its lowest point of that era. The financial transaction tax was overwhelmingly repealed in a bipartisan vote by Congress in 1965 because it made our stock market so inefficient.
A financial transaction tax would be a drag on the economy and bring in much less revenue than is estimated. The European Union conducted a massive study on the impact of a 0.1 percent financial transaction tax. The research found that such a tax would lower gross domestic product by almost 2 percent while only raising new revenue of less than 0.1 percent. The cost to the economy would be much more than the revenue raised.
This tax is not a partisan issue. Not only did a Congress controlled by Democrats overturn the financial transaction tax over 50 years ago, the policymakers today on both sides of the aisle have lined up against it. Gregory Meeks said a proposed transaction tax “hurts New York in a big way.” Bill Foster added that his “suspicion is that when you would actually score something like that, you would look at the drop in trading volume that would happen and you would find that the revenue raised would be small.” In 2009, Republicans and Democrats sent a letter to the Ways and Means Committee stating that the tax would depress stocks and “drive investments to financial markets in other countries” without the tax.
Business has a profound responsibility to ensure the economy works for all Americans and preserves their freedom and ability to succeed. The presidential candidates should work with business to develop common sense proposals that benefit hard working workers and businesses rather than ones that harm them. That means avoiding an unproductive tax that would land hardest on Main Street investors and savers, while producing little revenue. Some ideas, like this one, should simply be left in the past.
Tom Quaadman is the executive vice president of the Center for Capital Markets Competitiveness with the United States Chamber of Commerce.