February 18, 2016
In a Wall Street Journal column earlier this week, John Carney warned readers that the financial transactions tax (FTT) proposed by Senator Bernie Sanders “promises a smaller, slower market offering lower returns to investors.” He also warned that middle class investors will see higher costs in their mutual funds as a result of the tax.
While Carney treats the tax as a bit of a leap into the unknown, we actually have been there very recently. A FTT increases the cost of buying and selling shares of stock or other financial assets. We have had higher costs for buying and selling financial assets in the very recent past. The cost has fallen due to the rapid improvement in computer technology that has allowed for the price of trading to plummet in recent decades.
An FTT would raise the cost back to where it had been in prior decades. If a tax was structured along the lines being considered by European Union countries (0.1 percent on stock trades, 0.01 percent on derivative trades), then it would be raising costs roughly to where they were in the 1990s. These higher costs should then cause returns to investors to be comparable to what investors saw in the 1990s. (Past returns are no guarantee of future performance.) Markets don’t care if costs are higher due to a tax or less efficient technology, the impact is the same.
The amount of costs borne by middle class investors will depend on the extent to which their trading responds to higher costs. Most research indicates that trading will decline roughly in proportion to any increase in costs, meaning that most middle class investors would pay the same amount in trading costs after the tax as they did before the tax. (The recent study by the Tax Policy Center assumed that trading volume actually declined more than any increase in costs associated with the tax.)
The column also cited a study by the European Commission that purportedly showed a tax reducing GDP by 1.76 to 2.05 percent. Those numbers are from a preliminary study. A revised study found that the impact on growth would be less than 0.2 percent of GDP and that if the revenue was invested in the economy, it would be a positive 0.2 percent of GDP. That probably would not sound too scary to WSJ readers.
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