A key promise of President Joe Biden’s 2020 campaign was his pledge to limit any tax increases to those who make over $400,000 per year.
However, a recent push by progressives to implement a 0.1% financial transaction tax, or FTT, would break this promise. Marketed as a tax on fat cat Wall Street investors, this innocuous sounding tax would raise barriers for retail investors and punish people saving for retirement. While the FTT would apply to the buying and selling of financial assets, its supporters offer dubious claims that the tax will address market volatility and raise billions of dollars. In reality, this tax threatens retirement savings, including pension plans, and comes at the expense of Main Street investors.
People are not fooled by the rosy hit-the-rich-only Democratic Party rhetoric.
A recent poll by the U.S. Chamber of Commerce found 63% of likely voters opposed an FTT, including a majority of Democrats, Independents, and Republicans. This is not surprising considering more than half of U.S. households have a stake in the stock market, many in the form of 401(k)s or other saving plans.
It’s not just people with 401(k) plans that would foot the bill. A Modern Market Initiative report states 14 million people in the United States have 529 college savings plans, and an FTT could cost these savers from $2 million to $19 million. Consumers have benefited from lower costs associated with buying and selling stocks, but an FTT threatens to upend that. Punishing responsible investors and locking people out of the stock market would have major short and long-term consequences.
With so many repercussions for middle-class investors, why propose this tax?
Market volatility is often cited as grounds for an FTT, but this supposed solution is divorced from the problem. While caricatures portray Wall Street traders as feeding on high market volatility, most investors prefer low market volatility. In fact, volatility could increase if investors were incentivized to take locked-in positions. An FTT could reduce liquidity in the market by making trading more expensive. In countries where an FTT was tried, there was no substantial impact on volatility. Congress and regulators have plenty of tools in their belt to address market volatility, and this tax threatens to aggravate the problem instead of solving it.
As Congress considers another trillion-dollar proposal this year, some have pointed to an FTT as a way to boost revenue. Sen. Brian Schatz says his Wall Street Tax Act would generate $752 billion over the next decade, but this is likely a highly inflated number. An FTT has been tried numerous times and has failed to raise the projected revenue, and in many cases, the FTTs were subsequently repealed. France’s FTT was supposed to raise €1.5 billion annually but peaked at less than half of that. In the past 25 years, Germany, Japan, the Netherlands, and Sweden have repealed their FTTs, and according to the Tax Foundation, countries appear to be implementing and abandoning FTTs at similar rates.
Peddled as a small tax on the rich, this ill-advised policy will end up targeting Main Street investors. Luckily, some lawmakers are taking action to protect retail investors from this tax hike. Every Republican on the House Financial Services Committee signed on to a resolution condemning the imposition of an FTT. Let’s hope they succeed.
Will Yepez is a government affairs associate with the National Taxpayers Union, a nonprofit organization dedicated to advocating for sound tax policy at all levels of government.
