Progressives should know a financial transaction tax would hurt average Americans

The move to institute a financial transaction tax, which purports to target Wall Street fat cats, big investment companies and others such as hedge funds, is among the latest bad economic ideas supported by politicians who exalt their own good intentions. 

Some of the financial services firms being targeted have received publicity because of market issues, such as retail investor purchases of “meme stocks,” that prompted a series of hearings before the House Financial Services Committee this year. Such events provide fodder for those who desire to stick it to financial services companies.

Rep. Maxine Waters (D-Calif.), who chairs the Financial Services Committee, reportedly is rushing to schedule a markup of her Capital Markets Engagement and Transparency Act, to target short selling. Capitalizing on popular sentiment around January’s GameStop controversy to hurt short sellers may be appealing, but limiting short sellers’ ability to spot market inefficiencies and even fraudulent activity (such as the Enron case) ultimately could hurt financial markets. 

Waters has said she is open to a financial transactions tax. Other proponents employ standard talking points about Wall Street bonuses and tout the “very low rate” of such a tax to try to garner support. Sen. Brian Schatz (D-Hawaii) has reintroduced his Wall Street Tax Act, which has a 0.1 percent tax on every sale of stocks, bonds and derivatives (a companion bill was introduced in the House in January). The low rate perfectly illustrates the misleading nature of such a tax.

In fact, one analysis by SIFMA, a trade association for broker-dealers, investment banks and asset managers, notes that Vanguard estimates that for many average investors, a tax at this rate would cost a retirement saver who invests $10,000 per year over 40 years in a balanced portfolio of stocks and bonds around $36,000, or three and a half years’ worth of savings. This calculation might also apply to a typical middle-class head of a family. Put another way, these investors are far from being Wall Street “fat cats.”

Data from the Federal Reserve show that 53 percent of American households own stock and 80 million to 100 million Americans have 401(k) saving and investing plans. Those with pension plans — such as teachers, police, firefighters and other public-sector employees — hardly would be spared, either. A Modern Markets Initiative analysis found that a financial transactions tax would cost these plans billions of dollars, which would lower the savings and retirement income for participants. Leaving pensions underfunded, and possibly asking for taxpayer-funded bailouts, would worsen the situation for all. 

Others who advocate for a financial transactions tax say they are going after hedge funds and promoting public universities. For example, the Tax on Wall Street Speculation introduced by Sen. Bernie Sanders (I-Vt.) is paired with his College for All Act to make Wall Street pay for his idea to offer free college tuition.

Hedge funds may make easy verbal targets but, as with retirement plans, there would be consequences for many Americans. Pension plans rely quite a bit on investments made through hedge funds — close to 26 million workers benefit from such arrangements, with investments totaling nearly $790 billion. Nationwide, more than 300 colleges and universities invest a total of $145 billion in hedge funds, and there are investments totaling $500 billion from nonprofits, charitable foundations and endowments.

University endowments are a primary source of financial aid for students, research conducted by universities, faculty salaries, and other projects. Hampering the ability of schools to realize investment gains will lower the amount of money available for such uses, including assistance for lower-income students.

Given the illusory nature of proponents’ arguments, it will be telling to see how U.S. senators from Democratic-controlled states deal with the potential fallout from a financial transactions tax. Sens. Krysten Sinema (D-Ariz.) and Catherine Cortez Masto (D-Nev.) may be considered interesting examples. Recently released industry data show that hedge funds manage nearly $8 billion in institutional investments in Arizona and more than $2 billion in Nevada.

In Arizona, that amount includes managing more than $2 billion for the Arizona Public Safety Personnel Retirement System and the City of Phoenix Employees’ Retirement System, as well as for both the University of Arizona and Arizona State University, which together serve about 100,000 students. 

In Nevada, that same structure covers at least seven key retirement plans, including those for organized labor such as the Southern Nevada Culinary and Bartenders Pension Plan, the Nevada Resort Association IATSE Local 720 Retirement Plan, and the United Association of Plumbers & Steamfitters Local 525 Pension Plan, which combined have about 116,000 plan participants.

And Waters might be interested to know that in her home state, the California State Teachers’ Retirement System leads all public pension funds in benefiting from lending securities to short sellers — nearly $78 billion worth, according to data from the Securities and Exchange Commission.

In their zeal to hurt the “fat cats,” progressives in Congress apparently don’t mind hurting the retirement plans and other assets of average Americans — pensioners, teachers, firefighters, blue-collar workers, students and many others who depend on their investments. The proponents of a financial transaction tax should dedicate themselves to a different approach.

Mario H. Lopez is president of the Hispanic Leadership Fund, a public policy advocacy organization that promotes liberty, opportunity and prosperity for all Americans. Follow him on Twitter @MarioHLopez.