The financial services industry should oppose a securities transaction tax, which, if it ever became law, would ultimately be counterproductive for investors. Rather than cutting into earnings, the tax would be passed on to the investors who can least afford an additional squeeze on their finances, especially when it comes to their already fragile ability to save.
In a perfect world, the bill would be the right regulation: It would protect investors, bring clarity to advisors and fund firms and be neither burdensome nor crippling to a business.
Unfortunately, that’s not the kind of regulations that our industry deals with every day.
Congress, the White House and the states are always trying to find new and creative ways to increase revenue, especially in a tough economy. An ever-present example is through a proposed securities transaction tax, which is once again percolating in Congress.
The original bill introduced by Sen. Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Ore.) that would impose a three-basis-point tax on stock, bond and derivative trades, with some exceptions, died in committee. However, Rep. Keith Ellison (D-Minn.) and six other House Democrats introduced a bill on Sept. 17 called the Inclusive Prosperity Act (H.R. 6411) that would impose a tax of 0.5% on the sale of stocks, 0.1% on the sale of bonds and 0.005% on the sale of derivatives or other investments.
The normal way a transaction tax works is to impose a tax on either the buyer or the seller of a security at the time of transaction. While the authors of bills that would implement these taxes intend for firms to foot the bill, that will not happen. Instead, these new costs will be passed on to the investor, discouraging investing and ultimately putting up yet another barrier to saving.
What do the authors of the bills want to achieve?
First, they claim that these taxes will protect investors by limiting volatility allegedly caused by high-frequency trading. If financial services firms are forced to pay a tax on each transaction, then that will limit the number of transactions, somehow limiting volatility, or so the theory goes. Second, they claim that a transaction tax would raise much-needed revenue without hurting investors.
These are two seemingly worthy goals. But are they realistic?