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U.S. Chamber of Commerce Center for Capital Markets Competitiveness Event on FTT

U.S. Chamber of Commerce Center for Capital Markets Competitiveness

“Financial Transaction Taxes: A Tax on Investors, Taxpayers and Consumers”

Monday, September 16, 2019

Key Topics & Takeaways

  • Research on Financial Transaction Taxes: Angel stated that the FTT in Sweden decreased stock prices by 5 percent, did not raise revenue, and eventually led to traders leaving the Swedish markets. Angel then pointed out that when Sweden reduced its FTT, its stock values increased by seven percent, and when the FTT was finally repealed share values increased by 10 percent. He said the so-called “tiny” tax would hurt individual retirement accounts (IRAs), 401(k)s and pension plans, as well as pushing up the yield curve leading to other economic effects. He added that when Italy re-implemented an FTT in the wake of the financial crisis, their system raised half of the revenue projected by its proponents.
  • The Impact on Retirement Security and the Capital Markets: Roberson noted that fees from an FTT would be added costs elsewhere, and a double or triple increase in the tax would have unintended consequences. He said that an FTT would impact the frequency of trading and liquidity in the market, impacting market efficiency. Campbell stated that an FTT is a “disaster” for liquidity and revenue, and opined that the report produced by Professor Angel does a good job covering the impact. Campbell added that the Congressional Budget Office (CBO) reported that an FTT would discourage trading and harm factors that stabilize the market. Remo stated that most Americans make less than $50,000 a year, and access retirement savings through a workplace plan. He said that an FTT would have “insidious” impacts on workers, costing an individual roughly $20,000 over the course of their savings lifetime. Remo noted that each separate transaction, rebalance, and life cycle and target-date fund would be hit with a tax every time, potentially costing Americans $25 million.

Panelists

  • Tom Quaadman, Executive VP, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
  • James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University McDonough School of Business
  • Peter Roberson, VP, Legislative and Regulatory Affairs, Charles Schwab & Co Inc.
  • Terry Campbell, VP, Global Government Relations, Nasdaq OMX
  • Andrew Remo, Director of Legislative Affairs, American Retirement Association

Opening Remarks

Tom Quaadman, Executive VP, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce

Quaadman stated that due to the increase of introduced legislative proposals and commentary from presidential candidates, the U.S. Chamber of Commerce has determined there is a need to readdress the issue of a financial transaction tax (FTT). He said that proponents of an FTT state the tax will help stop market velocity and be a measure to collect revenue. Quaadman added that these were similar reasons to those put forward by President Herbert Hoover when he implemented an FTT, yet President Franklin D. Roosevelt later determined the tax did not raise revenue as proposed. He continued to state that it was President Lyndon B. Johnson who repealed the FTT in 1964, which ushered in a new era for retail investment. Quaadman said that findings show an FTT is a tax on main street investors’ retirement savings, with implications of increases to pension, corporate and mortgage costs. He added that an FTT has led to many concerns globally, most significantly in Sweden which lost market activity due to the FTT.

Presentation of Research on Financial Transaction Taxes

James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University McDonough School of Business 

Angel stated that he recently produced a report that outlines the impacts of an FTT.  He noted that historically FTTs in the U.S. had been implemented and repealed around the time of major wars, most recently after World War I. Angel argued that an FTT is a “bad” idea and does not make sense. He stated that the FTT in Sweden decreased stock prices by 5 percent, did not raise revenue, and eventually led to traders leaving the Swedish markets. Angel then pointed out that when Sweden reduced its FTT, its stock values increased by seven percent, and when the FTT was finally repealed share values increased by 10 percent. He said the so-called “tiny” tax would hurt individual retirement accounts (IRAs), 401(k)s and pension plans, as well as pushing up the yield curve leading to other economic effects. He added that when Italy re-implemented an FTT in the wake of the financial crisis, their system raised half of the revenue projected by its proponents.

Angel emphasized that dozens of academics have studied the impact of an FTT and that the tax does not help to increase revenue or reduce market volatility. He compared the U.S. to the U.K. system, stating that the U.K. FTT is applied to high-frequency traders, and only applies to the end investor. He added that the trading volume in the U.S. is 25 percent larger than that in the U.K. Angel expressed that the FTT fails to pass Adam Smith’s criteria to judge a tax system, based on efficiency, fairness, certainty, and convenience.

Question & Answer

An attendee asked if there is a formal way to tax Wall Street. Angel reasoned that when implementing a tax, it should be applied broadly, efficiently, fairly and with certainty and convenience. He expressed that the financial services industry is broad, and close consideration must be given to the precise goal of such a tax. Quaadman pointed out that financial services firms are not subject to geographic constraints, and such taxes could cost the U.S. industry power.

Panel Presentation on the Impact on Retirement Security and the Capital Markets

Peter Roberson, VP, Legislative and Regulatory Affairs, Charles Schwab & Co Inc.

Roberson said that Charles Schwab is not a principal investor and invests on behalf of the customer. He expressed that a tax is a complication for investor and client interactions and would impact the ability to drive down transaction costs. Roberson noted that fees from an FTT would be added costs elsewhere, and a double or triple increase in the tax would have unintended consequences. He said that Charles Schwab works to access the best stock prices for customers, and that an FTT would impact the frequency of trading and liquidity in the market, impacting market efficiency. He added that the spread between the stock bid price and the asking price is what determines market efficiency. Roberson said that if there is less trading, the spread will increase and over time would affect retirement savings portfolios for roughly 11 million customers.

Roberson also expressed concerns about the potential resources and costs associated with tracking and complying with an FTT, in particular with the rebalancing of exchange trading funds (ETFs). He stated that the market is “pretty” efficient, well-regulated, well-surveilled, with areas for improvement, but said that the consequences of implementing an FTT should be considered.

Terry Campbell, VP, Global Government Relations, Nasdaq OMX

Campbell said the FTT “wrecked” the market in Sweden, and it took a long time and a lot of hard work for their market to recover. He stated that an FTT is a “disaster” for liquidity and revenue, and opined that the report produced by Professor Angel does a good job covering the impact. Campbell added that the Congressional Budget Office (CBO) reported that an FTT would discourage trading and harm factors that stabilize the market. He noted that technology and accessibility to trading have made the market more efficient in the U.S, helping to drive down costs while an FTT would be disruptive for stock prices, reduce liquidity, and increase spreads, which will lead to higher volatility. He expressed that the idea that Wall Street needs to be “punished” for the financial crisis is not the right approach for lawmakers.

Andrew Remo, Director of Legislative Affairs, American Retirement Association

Remo stated that most Americans make less than $50,000 a year, and access retirement savings through a workplace plan. He said that an FTT would have “insidious” impacts on workers, costing an individual roughly $20,000 over the course of their savings lifetime. Remo noted that each separate transaction, rebalance, and life cycle and target-date fund would be hit with a tax every time, potentially costing Americans $25 million. He added that in a typical two-week pay period system, 26 different retirement savings transactions occur annually, and the average account is rebalanced six times a year. Remo called the desire to implement an FTT “beyond puzzling” after all the progress made over the last decade for retirement savings. He said that a potential unintended consequence would be the need for the Department of Labor to analyze if large target-date funds’ default trading options are appropriate due to their trading frequencies.

For more information on this hearing, please click here.