Before I criticize Bernie Sanders’ financial transaction tax plan, let me give him some credit for his willingness to impose a payroll tax to pay for a new “Family and Medical Leave Act” and for his willingness to impose an across-the-board income tax rate increase to fund a “Medicare-For-All” plan. He’s taken a lot of heat for wanting to raise taxes on the middle class, something other politicians aren ‘t willing to do. Just about everybody else in Washington either wants to cut taxes, even though they can’t figure out how to cut spending (cutting the rate of spending growth is hardly the same thing), or they’ve convinced themselves that the small handful of Americans who make over a million dollars a year can, and should, pay for everything for everybody all of the time. Both theories have been leading us down the road to more debt for way too many years.
Having said that, Sanders FTT plan is a really dumb idea. He says that the Treasury can raise as much as 350 billion dollars a year with a tax of 50 basis points on stock transactions and 15 basis points on bonds, enough to pay for free college tuition for anyone who wants to attend a public university. I’m not surprised his idea has been very well received by much of the the public, not to mention by the mainstream media and most of the pundits on the Sunday morning talking head shows. Sanders’ plan is yet another “soak the rich tax” – who doesn’t love that. But among investors and in the financial press Sanders’ tax makes for a different story. The problem really isn’t the concept of an FTT, the philosophy of it. The problem is the rate that Sanders is proposing.
Financial Transaction Taxes are hardly a new idea. Between 1914 and 1966 there actually was one (the rate was .1% on new stock issues and .04% on stock sales during most of that time). The State of New York had its own small tax on stock transfers until 1981. During the FDR administration a tax on stock sales was put into place in order to fund the SEC. It’s called the Section 31 fee. The rate is adjusted bi-annually depending on the SEC budget and trading volumes; the current rate is .00184%, projected to raise about 1.7 billion dollars this year.
During the late Eighties the FTT started to gain support among the politicians in DC as a means of excess market speculation, not just as a means to raise revenue in order to fund regulation of the financial markets. After Black Monday Lawrence Summers convinced Jim Wright (Speaker of the House) to push the idea, and after he was elected President George Bush Sr. lent his support, no to avail. But since the 2008-09 recession, interest has been growing again. A dozen or more bills have been submitted to Congress over the past 6 years, the most widely touted being the “Wall Street Trading and Speculators Tax Act” sponsored by Tom Harkin in the Senate and Peter Defazio in the House. This bill made its way to the Joint Committee in 2011 without being adopted, but it’s still floating around Congress with a fair amount of support. The bill claims to raise about 30 billion a year based on a .03% tax on stock and derivative trading with exclusions for pension and 401k plans.
Sanders FTT bill in the Senate is called the “Inclusive Prosperity Act of 2015”. It’s virtually the same bill as that introduced in the House 4 or 5 different times by Keith Ellison. I can offer myself as an example as to why the Sanders bill is so wrong-headed. I’m an active small investor. I make 100 to 300 short-term trades a year depending on the time I have available for trading. My quick trades usually involve about $20,000 and my goal is to make 1% on my position within a day or two or three. A 50 basis point FTT would eat up half of my profit, and after I paid a 25% Federal income tax and 8.5% Maryland (remember, these are short-term trades taxed at ordinary income tax rates) and paid brokerage commissions, exchange fees and the SEC Section 31 tax, my net profit would be no more than 15% of any gain. And that’s on a successful trade. If a trade was not successful and I took a loss, I’d still have to pay Bernie’s tax. Who the hell would do that?
What Bernie and the mainstream media and the public and the pundits who applaud his idea don’t seem to understand is that the overwhelming majority of activity in the financial markets is short-term. It’s true that most investors are long-term and that most shares are held long-term, but the activity itself, which is the object of the tax, is mostly short-term. The average turnover rate on a share of stock listed on the NYSE or NSDAQ last year was a bit over 1.5 (actually lower than in many previous years). 90% of stock shares barely turn over at all, so the turnover rate for those shares that do is something like 15, meaning that the government would be confiscating about 7.5% of the value of stock shares held for short-term trading every year. Most of the turnover comes from flash trading or programmed trading (“noise trading” is the new term) where sought-after gains are just a penny or two per share. Much of the rest of short-term trading comes from index funds and sector ETFs, which, by definition, have to constantly re-balance their portfolios. Small investors like me are just a tiny part of the picture. But it doesn’t matter; short-term activity for all of us would be equally quashed, as would most of the revenue that Sanders claims would be available for free tuition. Given that income tax revenues from short-term gains will also disappear from the Federal and state coffers, Sanders’ FTT might even result in a net tax loss. The ultimate irony is that index funds and sector ETFs, which have become the favored investment vehicles for Sanders’ beloved working and middle class voters over the past decade or two, will disappear too.
Here’s a link to a recent study by the Tax Policy Center for those interested in learning more about the FTT. There’s a discussion of FTT history and Europe’s experience with the FTT. The TPC doesn’t agree with me that a tax of 50 basis points might actually decrease revenue to the US Treasury, but they do conclude that an FTT of just 10 basis points is the optimum rate of tax and would raise more revenue, about 50 billion a year, than a 50 basis point tax. The TPC, by the way, is an arm of the Urban and Brookings Institutes, the most progressive of the various tax policy think tanks.
Here’s a link to a CBO study on the FTT from 2013. The CBO, like the TPC, concludes that the optimum FTT rate would be 10 basis points with the potential to generate 50 billion a year if carefully implemented. But the CBO also concludes that there are better ways to raise that amount of tax from the investor class.