The Facts Don’t Support the FTT

A recent article by Brookings fellow Aaron Klein proposed the U.S. adopting a financial transaction tax as a means to raise revenue and curb market activity. Imposing a financial transaction tax, or FTT, which is effectively a sales tax on investors, runs counter to many longstanding policies on savings and promoting economic growth. Not only would such a tax negatively impact all investors, it would also negatively impact the world’s most liquid equity market, to the further detriment of all investors. And, history has proven time and again, such a tax never raises anywhere close to the revenue promised, while wreaking havoc for investors and markets.

The effect of an FTT is a cascade of taxation that will accumulate during the standard operations of a mutual fund portfolio, resulting in significant reductions in overall returns.

A retirement saver who invests $10,000 per year over 40 years in a balanced portfolio of actively managed stocks (60%) and bonds (40%) with a 10-basis point tax imposed on purchases of securities would cost the investor some $36,000, more than 3 ½ years of annual savings.  Some proposals call for FTT rates as high as 50 basis points. Such a levy could cost the retirement saver as much as $200,000—20 years of annual contributions.

Investors in an active small-cap equity mutual fund would see a 20-year investment loss of more than $5,900 on a 10,000 investment – roughly 19% reduction. If the FTT is more than the 0.1% being proposed, the increase in additional time needed to save the same amount of money would be higher.

Parents saving for children’s college tuition will need to save approximately an additional $200 per year (4% increase), more if the FTT is above 0.1%. Pension plans, endowments, charities and donor-advised funds will all have to find the resources to increase funding levels to meet liabilities and payout goals.

Furthermore, the actual cost to investors is effectively much higher than the 0.1% rate of the proposed tax. If an investor purchases an asset for $10,000 that produces a 5% annual rate of return and holds it for a year before selling, the pretax return is $500. If a 0.1% FTT is assessed upon sale, the tax bill is $10.50 (0.1% of $10,500). The 0.1% FTT actually represents more than 2% of the income generated.

Beyond the significant reduction in pension fund values and annual returns for beneficiaries, recent studies have shown an FTT would erode retirement security by subjecting 401(k) plan participants to double taxation and penalizing individuals for activities such as moving assets from a 401(k) to an IRA. Imposing a de facto sales tax on the $28 trillion Americans have saved for retirement only compounds the problem of too little retirement savings in our country.

We have real-world examples of the negative impact of an FTT. The 0.5% tax on all purchases of shares of UK-listed companies resulted in a reduction of 1.52% to 2.38% in a typical pension fund at retirement (loss of between £6,441 and £11,538), a loss of £7,540 to £10,389 by programs like stakeholder pensions, an increase in the costs of the local government pensions and an increase in the cost of equity for publicly listed companies by around 7% to 8.5%.

After Sweden increased its transaction tax from 1% to 2% in 1986, 60% of the volume of the 11 most actively traded Swedish stocks migrated to London; Swedish All-Equity Index fell by 2.2% on the day a 1% transaction tax was introduced and again by 0.8% on the day it was increased to 2%.  When the day stamp duty in the United Kingdom was increased from 1% to 2%, the stock market index declined by 3.3%.

The narrower French and Italian FTT measures enacted around 2012 have been widely studied. According to a 2017 study by two European Central Bank economists, found the French FTT has had an adverse effect on liquidity and market quality.

In addition, the revenue collected from French FTT is less than half of what its advocates projected. Currently, FTT revenue amounts to about 0.08% of total French tax revenue and a smaller percentage of Italian tax revenue.

Another private study on the impact of the French FTT on U.S. trading in French American Depositary Receipts (ADR)s found there has been a very substantial decline in trading volume in French ADRs that has persisted since the tax was introduced.

Congressman Gregory Meeks (D-NY) recently highlighted an analysis from the Joint Committee on Taxation noting that the proposal would reduce taxable business and individual income in NY state, a heightened concern given that 18% of New York State’s tax collections were derived from the securities industry. This fact should resonate with all states as they assess the impact of an FTT on their citizens.

The U.S. market for fixed income securities is among the world’s deepest and most liquid. FTT proposals that apply to debt securities could reduce valuations which would increase interest rates. Americans could see higher rent and home mortgage payments as a result.

The advances in technology over the last 15 years have created a market ecosystem that benefits all investors, including individual investors. For less than $10, and in less than a second, everyday investors can execute trades in virtually any stock. The speed and low cost are possible because of the fully-electronic interaction of equities activity, including retail customers, institutional investors (which operate mutual funds for retail investors), and liquidity providers. Any action that reduces liquidity will harm trading efficiency and unnecessarily raise costs for all investors.

Kenneth E. Bentsen, Jr. is president and CEO of SIFMA, the voice of the nation’s securities industry. He is also CEO of the Global Financial Markets Association (GFMA), of which SIFMA is the U.S. regional member.

This post was originally published on October 19, 2019; it was updated on August 17, 2020 to reflect new data from Vanguard.