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Portfolio > Economy & Markets > Stocks

Democrats Introduce Bill to Tax Stocks, Bonds, Derivatives

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Democrats in the Senate and House teamed up on Tuesday to introduce the Wall Street Tax Act, which taxes the sale of stocks, bonds and derivatives at a rate of 10 cents per $100 of transactions, with the goal of reducing “speculative trading.”

In a joint statement, the lawmakers, Sens. Brian Schatz, D-Hawaii, and Chris Van Hollen, D-Md., and Rep. Peter DeFazio, D-Ore., said their bill would create a new progressive tax on financial transactions “that would generate billions in revenue, while addressing economic inequality and reducing high risk and volatility” in the market.

The Wall Street Tax Act addresses “the disconnect between the financial system and the real economy by reducing unproductive and speculative trading,” the lawmakers said.

“By increasing transaction costs slightly, the bill will help redirect investment that has flooded into transactions without economic value into more productive areas of the economy. It will also reduce the risk of financial crashes and limit the risks that high-speed arbitrage pose to our financial system.”

The Wall Street Tax Act would tax the sale of stocks, bonds and derivatives at 0.1% (10 basis points), and would raise an estimated $777 billion over a decade.

The tax would apply to the fair market value of equities and bonds, and the payment flows under derivatives contracts. Initial public offerings and short-term debt (with a maturity of less than 100 days) would be exempted.

DeFazio added that “risky financial behaviors like near-instantaneous high-volume trades have destabilized our financial markets while contributing nothing to the economy. Congress needs to rein in excessive speculative activity and protect working families from these dangerous practices while maintaining appropriate market liquidity.”

The bill also has received a nod from Joseph Stiglitz, a Nobel Memorial Prize-winning economist and former chief economist for the World Bank. “‘Bad’ taxes distort the economy and increase societal inequities. Good taxes can simultaneously raise revenues because they promote growth and equity,” Stiglitz said in the statement issued by the lawmakers. “The Wall Street Tax Act is an example of the latter, a good tax that encourages the economy to move away from wasteful, excessive, short-term financial transactions toward more productive activities that enhance the well-being of our entire economy.”

Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said in a statement shared with ThinkAdvisor that SIFMA “is strongly opposed to the imposition of a sales tax on investors, which is the essential impact of a financial transaction tax. An FTT will raise costs to the issuers, pensions and investors who help drive economic growth, negatively impacting those saving for retirement, college or to buy a home by decreasing the amount of their savings.”

Moreover, Bentsen argued, “major economies that have adopted such taxes have had overwhelmingly negative results, including reduced asset prices, trading moving to other venues, market dislocation and decreased liquidity. Past experience also suggests that it would raise less revenue than supporters often claim.”

Marcus Stanley, policy director with Americans for Financial Reform, predicted the bill would “push Wall Street away from extremely short-term speculation, and towards longer term investments that can contribute to the real economy, as it also requires Wall Street to pay more of its fair share in taxes.”

Added Stanley: “Today, a set of Wall Street firms make money from high-frequency, speculative trading, often holding financial instruments for minutes, seconds or even milliseconds. These are not long-term investments that provide capital for real economy businesses or communities. They pose a risk to the markets, put small investors saving for retirement or other family needs at a disadvantage, and feed the wealth gap, making some traders enormously wealthy.”

Brian Graff, CEO of the American Retirement Association, added that the bill is “called the Wall Street Tax Act, but it’s really a Main Street savings attack.”

While the legislation’s sponsors claim it is targeted at “unproductive and speculative” trading, Graff continued, “the Wall Street Tax Act’s financial transactions tax on the sale of stocks and bonds apparently includes those held within the trillions of dollars of retirement savings invested in mutual funds and collective investment trusts by pensions and 401(k) s.”

After years of attacking 401(k) plan fees, Graff added, “some members of Congress now want to charge 10 basis points every time a hard-working American contributes out of their pay into their 401(k).  And then charge another 10 basis points every time the account is rebalanced.  And then, another 10 basis points when that worker retires and sells some of those investments so they can maintain their standard of living.”

Graff added: “We’re talking about the equivalent of an across-the-board fee increase on 401(k) plans.”

A group of 61 organizations including labor and consumer groups endorsed the bill.


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