How much would financial transaction tax hit 401(k) savers? Scorekeepers don’t say

Recently introduced legislation that would tax most securities sales stands to create a significant new source of revenue for the federal government.

The Wall Street Tax Act of 2019, introduced this month in both chambers of Congress by progressive Democrats, would levy a 10 basis-point tax on traded stocks, bonds, and derivatives, with some exemptions for new issues and short-term debt. Proposals in previous congressional sessions would have created a 3 basis-point tax.

The bill has 19 sponsors in the House, but would likely be dead on arrival in the Republican-controlled Senate.

But the idea of a financial transaction tax is likely to come into play during the 2020 campaign season, as Democratic presidential candidates are forced to provide specifics on how they hope to pay for ideas to expand social safety nets, re-haul the economy to address climate change, and rebuild aging infrastructure.

As part of a compendium of policy options to raise federal revenue and address federal debt, the Congressional Budget Office said a 10 basis-point tax on trading would raise nearly $777 billion over the 10-year budget window. That number is based on analysis from the Joint Committee on Taxation, which provides revenue and cost estimates for Congress.

Supporters of the tax say it would staunch high frequency trading.

Critics say it would also be levied on trading in qualified retirement accounts like 401(k)s and IRAs, as well as add costs to privately and publicly sponsored pensions, many of which are already stressed from chronic underfunding.

“A financial transaction tax would ultimately harm individual investors who are saving for retirement, education, and other financial goals,” Shelly Antoniewicz, senior director of industry and financial analysis at the Investment Company Institute, recently told BenefitsPRO.

Antoniewicz said the tax would have the same effect as increasing the average expense ratio on an equity mutual fund in a 401(k) by 31 percent, and would have reduced the return on long-term mutual funds by $23 billion in 2018. “Transaction taxes hit Main Street—not just Wall Street,” she said.

How much would retirement accounts be hit? Congress’ score keepers don’t say

Just how much of the $777 billion would come from rank-and-file Americans’ retirement accounts? Congress’ scorekeepers haven’t fleshed that out—or if they have, they aren’t yet making that analysis public.

In an email, Thomas Barthold, chief of staff of JCT, said the estimate provided to CBO accounts for transactions in qualified retirement accounts, and includes potential changes to markets and market behavior under the potential tax.

“The staff of the Joint Committee on Taxation works on a confidential basis for the members of Congress and does not provide supplemental information regarding estimates to the public on a routine basis,” said Barthold. “The information that the CBO has made available regarding our analysis of this proposal is the only information available to the public at this time.”

Possible ‘negative effects’

Proponents of a financial transaction tax claim high-frequency trading destabilizes markets by adding unnecessary volatility to securities prices.

But analysis from the CBO—which does not imply an endorsement or rejection of the policy idea—says the tax could create less stable markets.

“Empirical evidence suggests that, on balance, a transaction tax could make asset prices less stable. In particular, a number of studies have concluded that higher transaction costs lead to more, rather than less, volatility in prices,” CBO says, which did note that much of the academic research on trading taxes was conducted before the rise of high-frequency trading.

Moreover, the tax could discourage all short-term trading, and not just speculative trading, “including some transactions by well-informed traders that stabilize markets and help establish efficient prices that reflect more information about the fundamental value of assets,” according to CBO’s analysis.

For long-term investors, CBO says the tax would be small relative to investment gains. But less frequent trading would reduce liquidity, and invested dollars could decline. The cost of issuing Treasuries could increase from higher trading costs and reduced liquidity. Asset prices could be reduced under the tax, lowering household wealth, and in turn lower consumption rates.

And traders could be incentivized to invest in markets outside the U.S. that don’t have a financial transaction tax, or develop investment strategies not subject to the tax.

Even if there would be greater societal good from the tax, CBO says the $777 billion revenue estimate is not guaranteed.

“The estimate relies on the Congressional Budget Office’s projections of the economy and market activity over the next decade, which are inherently uncertain,” CBO says.

It is also unclear exactly how much a tax would impact trading, which would in turn impact how much money the tax could raise. On a typical day, more than $1 trillion in stocks and bonds are traded. If trading was impacted less than assumed, the tax could raise more revenue. On the flip side, if the tax stifled trading more than assumed, less revenue would be raised, CBO says.