Democratic Sen. Brian Schatz and Rep. Peter DeFazio introduced last month in both the Senate and House the “Wall Street Tax Act,” a bill that would levy a 0.1% tax on the value of securities transferred in financial transactions.
The Democrats from Hawaii and Oregon, respectively, are hailing it as a “new progressive tax” to raise revenues, address income inequality and reduce market volatility.
The reality is a tax of this sort would hammer investors who are saving for retirement, education and other financial goals like buying a home or a car.
Yes, a 10-basis-point tax sounds minor, but analysis by the Investment Company Institute says such a tax would have reduced the returns of stock, bond and hybrid mutual funds by $23 billion in 2018 alone.
Fund fees have been falling for many years now, and even a 0.1% tax would have about the same effect as increasing the average expense ratio that 401(k) participants are hit with for investing in equity mutual funds by a staggering 31%.
Money market investors would be hit even harder, getting hammered by additional $20 billion in additional costs as a result of the tax, which would reduce the return on money market funds that average less than 2% by 0.71 percentage points.
Simply put, this tax would reduce the savings of 56 million U.S. households owning mutual funds — 49% of which make less than $100,000 a year.
Sorry, middle class.
For fund investors, the costs of a financial transaction tax add up quickly,because the tax would be levied on multiple levels. An investor’s account would be taxed when the fund buys securities to put her savings to work in the market; taxed again when the fund rebalances its portfolio or otherwise buys and sells securities in response to changing market conditions while she is holding shares; and taxed yet again when the shareholder redeems fund shares. In effect, this investor would pay the financial transaction tax three times.
The tax’s toll doesn’t stop with the cost to investors. It would also harm capital markets by degrading their competitiveness and causing trading to migrate to lower-tax countries. For an example, look at Sweden, which adopted a financial transaction tax in 1984. After Sweden doubled the rate in 1986, half of all trading in Swedish equities migrated outside the country, primarily to London. Burned by the experience, Sweden got rid of its financial transaction tax in 1991.
When a financial transaction tax became effective in France in 2012 and Italy in 2013, both countries experienced immediate declines in trading volume, and neither country raised even half of the revenue that had been projected during the first year their taxes were in effect. There is also evidence of firms purchasing securities of issuers located in other European countries as substitutes for French or Italian securities.
For all these reasons, opposition to a financial transaction tax is soundly bipartisan. After the bill’s introduction, numerous Democrats and Republicans went on record in opposition.
As Timothy Geithner, Treasury secretary during the Obama administration, said about financial transaction taxes in 2009: “There’s a real risk that retail investors, who’ve got fewer choices, they end up bearing the cost of the tax.”
ICI research shows that this risk is the likely reality. It’s simply not a risk worth taking.