Financial Transaction Tax Will Hurt Main Street, Not Wall Street

Progressives have been pushing for a financial transaction tax for years with very little support. Many seem to think the political winds are finally blowing in their direction after the disarray caused by the volatility in GameStop’s stock earlier this year. Despite the renewed fervor, a financial transaction tax was – and still is – an awful idea for the future the economy. Rational policymakers should continue to avoid it.

The proposal being put forth would implement a one dollar tax for every thousand dollars of financial transactions (0.1 percent). While this may seem rather modest, estimates by the Congressional Budget Office show that this would create roughly $777 billion in new taxes over the course of a decade. Given the battering the U.S. economy has taken amidst the coronavirus pandemic and associated lockdowns, enacting a tax hike of this scale is patently absurd.

Estimates also show that a financial transaction tax of even this size will result in underfunded pensions. Each year, roughly $900 billion is invested by pension plans into hedge funds. Hedge funds would be particularly adversely impacted by this tax given that they are far more active in trading than traditional actors. The same estimates project that, if this were the case, the average American would have to work an extra two-and-a-half years before retiring.

As with most populist proposals that seek to lift up the “little guy” at the expense of the big players on Wall Street, the opposite may end up coming to pass. Excess costs borne by large companies will almost inevitably be passed on to consumers – as are most taxes. It will also make it harder to buy and sell securities in a nation where more than half of its citizens are invested in the stock market. Despite what proponents will say about this measure, there will be lasting damage done to Main Street. Meanwhile, those on Wall Street may be made uncomfortable, but will have the resources to tolerate the change.

If the hedge funds that are the ostensible target of such a tax decide they don’t want to tolerate the change, however, the alternative is potentially more damaging to the economy. In response to transaction taxes proposed by the New York state government, the New York Stock Exchange (NYSE) threatened to relocate to Texas. A federal financial transaction tax could see hoards of businesses relocate their operations overseas to avoid the fees.

Policymakers need not view this discussion in a vacuum. A financial transaction tax has been tried before in Sweden – a nation admired by many of the tax’s biggest cheerleaders. Even Sweden abandoned this approach very quickly after it saw trading volume shrivel at an alarming rate. If such a tax were to have a similar impact in the U.S. it would also fail to generate the revenue advertised by the proponents. History exists to teach lessons. Our leaders must be willing to learn.

While the temptation to react to perceived injustice or rampant volatility is strong, levelheaded policymakers must resist such temptation. A financial transactions tax is an incredibly short-sighted proposal that would cause economic pain across the nation and across the socio-economic spectrum.