House Progressives like Rep. Ilhan Omar (D-Minn) and Rep. Ro Khanna (D-Calif) are using the recent story of Robinhood and others halting the buying of GameStop stocks as an excuse for a new, trillion dollar tax on financial transactions.
Rep. Ilhan Omar specifically called for financial transaction tax of 0.1 percent, which she claims would raise $1 trillion in tax revenue. This tax would not be on Wall Street as Rep. Omar claims but would be on American savers and investors including the 53 percent of American households that own stock.
While the 0.1 percent rate may seem like a small amount, it would be imposed on every single trade and would harm investment and economic growth. It is unlikely to raise as much revenue as supporters claim, and it has failed in the past.
Omar wants to use this tax revenue for new wasteful spending including cancelling all student debt and making college free.
A small tax – 0.1% – on each Wall Street trade would reduce high frequency trading, a practice which drains profits from retail investors and benefits only the very rich.
We could use the close to $1 trillion it would generate to cancel all student debt and make college free. https://t.co/z4ZZo4Pdui
— Ilhan Omar (@IlhanMN) January 28, 2021
By imposing a barrier to trades, this tax will increase the cost of capital and reduce productivity, which would in turn harm wages and jobs.
This tax would also increase market volatility as there would be fewer buyers and sellers and therefore more price jumps. An FTT would especially impact fund managers that are responsible for 401(k)s, pensions, and index funds and make frequent trades. As a result, returns on pension funds and other savings would be lower because of the increased the costs of buying and selling and the reduction in value of shares.
In fact, BlackRock has previously estimated a financial transaction tax of 0.1 percent would result in an investor losing $2,300 in returns on a $10,000 investment in a global equity fund over ten years. A study of New York State’s FTT that was in effect between 1932 and 1981 found that the tax increased the cost of capital, reduced trading and increased market volatility.
This tax would also cause significant damage to the life savings of American families. The Modern Markets Initiative conducted a 2021 study on a proposed financial transaction tax ranging from 0.02-0.5 percent. This analysis found that the FTT would cost $45,000 to $65,000 over the lifetime of a 401(k) account.
As noted, FTTs have failed in the past. In 1984, Sweden imposed a financial transaction tax, a proposal that lasted just six years. Even though investors were restricted in moving capital to foreign markets, most trading migrated to London to avoid the tax. Not only did this mean the FTT raised little revenue, capital gains tax revenue dropped because of a reduction in sales. When it was abolished in 1990, investment began to return to Sweden.
Finally, a FTT simply does not raise the revenue supporters claims it does. In other words, it would not, in fact, erase all student debt and make college free. This tax would have the indirect effect of reducing income tax and capital gains tax revenue because it would reduce trades and cause capital to flee. When Italy and France imposed FTTs in 2012, both countries raised less than a quarter of expected revenues.
The Congressional Budget Office found that imposing a FTT in the U.S. would “decrease the volume of transactions” and “probably reduce output and employment.” Some have predicted that a financial transactions tax would raise little, if any, net revenue because of these negative impacts.
A $1 trillion financial transactions tax would be borne by the American people, not Wall Street as Rep. Omar claims. This would punish investment, leading to market volatility and a reduction in output and employment. Once again, Democrats are not letting a crisis go to waste. Instead, they are taking yet another opportunity to implement a new, nationwide tax on the people.