Although there are nuances to how the taxes are implemented, the cost would almost certainly be passed on to shareholders. One result that we can more directly assess is how mutual fund investment returns would decrease because of the taxation of trades within the portfolio. The Financial Transaction Tax Would Affect Various Fund Strategies Differently These impacts can only be indirectly estimated and involve dynamic modeling, whether it be from testing a range of responses or assessing how markets in other countries reacted. There are opponents of the idea who say it could put market liquidity at risk from the reduction in trade volume. It would likely decrease asset values because trading them becomes-even if only slightly-more expensive. As this would be a tax on all transactions, it would increase taxes on accounts traditionally shielded from them, such as 401(k) plans. The question that most people have is: How much will this nevertheless affect average investors?Ī financial transaction tax would impact average investors in a couple of ways as the market reacts to the tax. The greater burden on high-frequency traders than most investors is undeniable. Proponents of the tax say that it will reduce high-frequency trading, making the market less risky and protecting against a financial crisis, and that these traders would contribute the lion’s share of the funding, minimally impacting most investors. There were multiple financial transaction tax bills introduced in the Senate last year, and it was a part of budget and reform proposals for several presidential candidates, including Elizabeth Warren, Michael Bloomberg, and, now vice presidential candidate, Kamala Harris. While consensus on exact implementation details is still lacking, there has been renewed interest, among Democrats, over the past 18 months in instituting a financial transaction tax. The details can get fuzzy: What transactions count as “in the U.S.”? Are all securities taxed the same? What rate or fee is charged?
The concept of the tax is relatively simple: Tax a small portion of sales and/or purchases of financial securities in the U.S. This fee is an extremely low rate of 0.00207%, whereas financial transaction tax proposals would increase rates nearly 50- to more than 240-fold, all the way up to 0.1% to 0.5% per transaction. A so-called “Section 31” fee is assessed on securities sold on all national exchanges and used to fund the SEC’s operations. already has a very small version of a financial transaction tax. Financial transaction taxes have been proposed in the United States going back decades and exist in many other markets including the United Kingdom and France. The What and Why of a Financial Transaction TaxĪ financial transaction tax is not a novel idea. While much of the analysis on such a financial transaction tax focuses on the effect on high-frequency traders and market liquidity, there could be unintended side effects for retirement savers.
It is also one of the few avenues a Joe Biden administration would have, should he win the upcoming presidential election, to raise revenue without explicitly raising tax rates for lower- and middle-income households. A blanket financial transaction tax would completely scramble this math by taxing all financial transactions. Savvy investors already try to reduce their taxes by investing in tax-favored accounts such as 529s, IRAs, or 401(k)s and avoiding investments, such as active mutual funds, that pay out distributions in a taxable brokerage. 26, 2020.īenjamin Franklin once wrote, “In this world nothing can be said to be certain, except death and taxes.” True enough, but he missed that the magnitude of the latter is anything but certain. A previous version of this article appeared on Feb.
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