Albert Einstein famously said, “insanity is doing the same thing over and over again and expecting different results.” While that would certainly be the case in physics, the same can be said as policymakers consider a financial transaction tax (FTT) that would harm Mr. and Mrs. 401K.
An FTT is a tax on every financial transaction. That means every purchase or sale of a bond, stock or mutual fund would be taxed. If you’re an individual investor, you would be taxed every time you click to purchase or sell a company’s shares, a government bond or a share in a mutual fund. It also means workers would be taxed every time they buy or sell stocks through their 401K retirement plan.
As we have seen many times before, the pattern is similar: An FTT is instituted, various tax rates are imposed and then reduced, and the tax is finally eliminated. Whether it is Sweden, Germany, Japan, or numerous other countries, FTTs damage the retirement community, investors, businesses and economies.
The U.S. has already lived through an unsuccessful experiment with an FTT from 1914 to 1965. With the support of Presidents Kennedy and Johnson, the tax was ultimately repealed in an overwhelming bipartisan vote by a Democratic Congress. A 1965 report by the Committee on Ways and Means found that taxes like the FTT “were not developed on any systematic basis and are often discriminatory in their application to the taxed industries or to the purchasers of the taxed products.”
It is now 2020 and still there are those in Congress who are proposing to bring back an FTT. Just as concerning, FTT proposals are being introduced at the state and city level. State budget shortfalls pose a legitimate challenge that states need to solve, however an FTT is not the correct solution to this problem.
Some policymakers in New Jersey, New York, and Illinois – states that are home to major stock exchanges and data centers – are seeing potential dollar signs from an FTT yet are entirely disregarding the many warning signs from history. FTTs have been erroneously pitched by various proponents as a painless way to raise vast sums of money from the financial services industry for special projects.
Members of the New Jersey legislature have proposed legislation they hope would raise millions in new revenue by taxing financial transactions processed through electronic infrastructure located in the state. This tax would not only penalize retirement savers who are residents of New Jersey, but also investors from other U.S. states and internationally.
In New York, legislators are seeking funds for the state’s general fund and future infrastructure projects through a proposed FTT. The New York tax would also negatively impact both New York and out-of-state investors.
And at the local level, the Chicago City Council has discussed proposing an FTT to help cover the city’s $1.25 billion budget shortfall in 2021. The tax is not supported by either Chicago’s Mayor or its Chief Financial Officer, who explained to proponents that an FTT could harm the city’s financial condition, particularly by encouraging financial firms to leave Chicago
An FTT is the wrong solution for raising revenue, whether it’s to cover a state’s budget shortfall or for new policy priorities. A 2019 report by the Center for Capital Markets Competitiveness outlines the numerous negative implications an FTT would have on retirement savers, investors, consumers, businesses, and the economy.
The real burden is borne by Main Street. An FTT will rob American workers of a substantial portion of their pension, 401(k) or mutual fund savings, and it will take investors longer to save for retirement, a first home or their children’s education. The tax also harms consumers who will pay higher prices for groceries and gas, homeowners who will pay higher mortgage rates, and all taxpayers who would pay more as the cost of public projects increases. The cascade of these negative impacts will exacerbate the fiscal pain felt by many American families who are struggling during the pandemic, particularly as they are already falling behind on retirement savings due to COVID-19.
While policymakers see the lure of easy revenue, experience shows that FTTs rarely raise the desired net revenue and instead suppress economic and trading activity. In fact, FTTs worsen revenue by driving market participants to relocate their activities. For example, after Sweden imposed an FTT, 50% of its trading volume moved offshore to London within four years.
An FTT at the state level in the U.S. could drive the exchanges and other financial services firms to move to other states. The migration of these firms and their employees means a loss of tax revenue and employees. The many small businesses and workers that support the financial services ecosystem in these states would also experience a corresponding loss of revenue and jobs.
There is clear evidence that FTTs do not work. States and cities would be wise to look to the history of the many countries who’ve imposed an FTT and either scaled back or eliminated them due to their deleterious impact on the economy. But most importantly, as savers are scrambling during this economic crisis now is not the time to reduce their savings and make their future an insecure one.