•Press Release Inequality United States Wall Street
Washington, DC — Many countries levy small taxes on financial transactions, called a Financial Transactions Tax (FTT), to reduce wasteful trading, but only recently has the practice gained support in the United States. One remaining roadblock to a proposed 0.1 percent tax is concern that the tax would impact the solvency of public and private pension funds.
Financial Transactions Taxes: A Wall Street Levy that Won’t Affect Pension Funds, by Dean Baker, and published today by the Center for Economic and Policy Research (CEPR), shows an FTT would have a minimal impact on the solvency of pension funds.
The study examines several of the largest public pension funds in the US and finds that a substantial share of pension fund assets is invested in countries that impose FTTs. Pension funds that are cautious of a Wall Street levy, willingly invest a substantial portion of their assets in countries with FTTs without reducing investment returns.
The study also finds that the savings from the reduced volume of trading that typically follows the imposition of an FTT, roughly offsets the cost of the tax. The reduction in trading volume translates into lost revenue for the industry, which explains why it is so strongly opposed to an FTT.
“Trading is largely a zero-sum game,” as Baker explains the principle. “Every trade has a winner and a loser, which should average out for most investors. Increased trading volume can only improve returns on average if it leads to better outcomes for the economy as a whole, which is not a plausible story in the US economy at present.”
For example, a 0.1 percent tax on a pension that turns over 30 percent of its portfolio each year would see a direct cost from the tax of 0.03 percent of the pension fund’s assets. It would be expected that pension funds would respond to the levy by reducing trading volume. The pension funds would trade less, and the money saved as a result of reduced trading would be roughly equal to the amount that the pension fund has to pay out for the FTT leaving its total trading costs approximately the same.
“There is little reason for pension funds to fear an FTT. In fact, if the revenue is used for productive ends, pension funds should share in the gains to the economy as a whole,” concludes Baker.
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For more on Financial Transactions Taxes, see these recent publications by Dean Baker:
The Left Becomes Center: Financial Transactions Taxes and Beyond
February 7, 2020
Taxing Financial Transactions Is More Strategic Than Taxing High Wealth
October 7, 2019
Senator Sanders and Representative Lee Propose to Make Wall Street Pay
May 21, 2019