A Financial Transaction Tax Could Raise Revenue, Curb Inequality

October 28, 2019

Steve Wamhoff
Federal Policy Director

A new report from ITEP explains the potential benefits of a financial transaction tax (FTT), which is supported by several presidential candidates. Few proposals can be said to raise revenue for public investments, make our tax code more progressive, and improve the efficiency of our financial system all at the same time. An FTT can do all of that.

An FTT would be applied at a low rate (a fraction of one percent) on each trade of financial assets like corporate stocks, bonds and derivatives.

An FTT would reduce trading, particularly high-frequency trading that depends on volume and the sophistication of trading tools.

But the volume of trades would nonetheless remain vast, meaning an FTT even with a low rate could raise hundreds of billions of dollars over a decade.

Typically, financial trades are made on behalf of investors by financial institutions, which would directly pay the tax. At that point, one of two things would happen, and either one makes the FTT a progressive tax.

The first possibility is that financial institutions pass the tax onto investors as higher transaction costs. This would make the FTT a progressive tax, given that most financial assets are held and traded by the wealthy.

The second possibility is that investors would actually save money and the tax really would be paid by financial institutions. To the extent that financial institutions engage in trading that is not truly in the interest of their clients but instead serves only to generate fees, an FTT could reduce this unnecessary churning of assets, resulting in savings for investors and fewer fees for the financial institutions which would, therefore, bear the cost of the tax. Given who owns and works at financial institutions, this would also make the FTT a progressive tax.

Even if the costs are passed onto investors, the consequences for the vast majority of Americans would be too minimal to even be noticed. ITEP cites a recent report from Public Citizen estimating the average retirement-related cost increase from an FTT of 0.1 percent for households at different income levels. For example, among the middle 20 percent of households, only 53 percent have retirement savings. Public Citizen’s report estimates the average cost increase among households in that middle-income bracket with retirement accounts would be $13 in a single year.

Members of the next Congress will need to consider all options to raise revenue for public investments and fix our economy. A financial transaction tax should be on the list of proposals they consider very seriously.