Congressmen Brian Schatz of Hawaii and Peter DeFazio of Oregon have introduced the Wall Street Tax Act, a crass and poorly constructed tax on financial transactions. More specifically, the bill aims to charge a 10 basis point fee on all financial transactions (stocks, bonds, derivatives, etc.). The bill is backed by Alexandria Ocasio Cortez, a fact that I guess is relevant because we are supposed to know her take on everything under the sun. So far the only Presidential candidate to publicly back this bill is Sen. Kristen Gillibrand of New York, though Bernie Sanders backed a similar bill in 2015.
What does this mean for investors? The good news, for now, is that it means nothing because it is going nowhere. The bill will not have anywhere near unanimous Democratic support (there remain some Democrats who can count, and who are not determined to destroy the American financial economy), and it certainly wouldn’t have Republican support to get through the Senate, let alone overcome a Presidential veto. However, the bill may very well have life in a post-2020 world if the Democrats consolidate power, and it is worth understanding why a “tax on high-frequency trading” is no such thing at all. Rather, this is a tax on middle-class investors.
Like the 3% wealth tax, Elizabeth Warren is proposing, and the 70% top marginal rate the aforementioned AOC is proposing, this financial transactions tax seeks to appeal to the class envy strain of American culture. The cleverly titled “Wall Street Tax Act” plays to the angst so many have about the very concept of Wall Street. But beyond the politics of it or misguided Marxian impulses, let’s look at the actual substance of the bill:
“Wall Street has made record profits from high-risk trades” – says the bill’s co-author, Brian Schatz. It would be difficult to imagine ten words containing more nonsense. Equity trading as a percentage of Wall Street profits is at a generational low, the marginalization of trading fees being a result of market forces, not government intervention. But just what are the “high-risk trades” they refer to? Bid-ask spreads are the tightest they have been in history, and markets now enjoy the most modernized, transparent, sophisticated, manageable trading environment we have ever seen (this applies to fixed income and equities). Market forces themselves are prone to volatility, because, well, they are market forces. But what this systemic risk of “high-risk trades” is, we are never told.
But let’s just cut to the chase beyond the inane pretext for the bill. Who really pays the 10 basis point fee on every single transaction? Middle-class investors do. A $10 additional charge on a $10,000 stock purchase adds 200% to the average trading cost of $4.95/trade. The massive volume of stocks and bonds bought by mutual fund investors, 401k participants, pension funds, and other investors with an average balance of below $250,000 will marginally suffer the most. The American Retirement Association estimates that the net effect of this bill would be to increase 401k expenses by 31%.
Less liquidity in the marketplace (as France experienced in 2012 with a similar misguided bill) hurts everyone. Incentives to move trading for sophisticated investors to overseas exchanges avoids the tax, and takes business away from American capital markets. No matter how small and deceptive the tax may be, there is only one source where the revenue comes from in this tax construct: From the investment returns of American investors. When compounded over many years, the result is meaningful and dangerous. This represents a re-allocation of resources from where it is most needed (in capital formation and investment productivity) to where it is least needed (in government redistribution).
History has taught us that these types of initiatives raise less revenue than promised, and have worse side-effects than predicted. The Wall Street Tax Act is a tax on Main Street investors and should be treated as such.
