Proponents say tax could help fund infrastructure programs, while Wall Street groups contend it would hurt investors
The wild volatility in GameStop Corp. shares this year has emboldened Democrats who support a tax on stock trades.
A financial-transaction tax, or FTT, would raise money by collecting a fraction of the value of securities trades. Proponents say such a tax could help fund programs like President Biden’s $2 trillion infrastructure plan, while reining in high-frequency trading and excessive speculation. Critics, including Wall Street lobbying groups, say it is a flawed policy that would hurt investors.
Left-leaning politicians such as Vermont Sen. Bernie Sanders have long advocated a transaction tax, with little success. Now, with Democrats holding the White House and narrow majorities in Congress, progressives have their best chance in years of enacting an FTT. Potentially, such a tax could be passed without Republican support, using the budget-reconciliation process that allows tax and spending bills to pass the Senate on a simple majority vote.
To be sure, the odds are still against an FTT passing Congress. There is broader support among Democrats for other ways to raise revenues, such as lifting the top individual tax rate or corporate tax rate, both of which were lowered under former President Donald Trump. Still, the idea of taxing trades has gained traction among more centrist Democrats in recent years, raising the hopes of FTT advocates.
“There’s much broader support and interest in the concept among members of Congress than there was a decade ago,” said Antonio Weiss, a Treasury Department official in the Obama administration who proposed his own version of a transaction tax last year.
Mr. Weiss’s plan calls for a 0.1% tax on stock, bond and derivative trades that would be phased in over a multiyear period. Such a tax could raise $60 billion a year, he estimates. Some lobbyists and tax-policy advisers see his plan as a basis for a bill that could win over Democratic moderates.
‘One way to ensure that this enormous wealth generated on Wall Street actually reaches the real economy…is to enact and look at proposals like a financial transaction tax.’— Rep. Rashida Tlaib (D., Mich.)
Lately, the FTT issue has gained fresh visibility from an unlikely source: GameStop. After the furious rally and subsequent crash of the videogame retailer’s stock in January, politicians and pundits have stepped up scrutiny of high-speed trading and questioned whether the stock market is fair to small investors. Some progressives have seized the opportunity to promote an FTT.
“One way to ensure that this enormous wealth generated on Wall Street actually reaches the real economy…is to enact and look at proposals like a financial transaction tax,” Rep. Rashida Tlaib (D., Mich.) said at a hearing of the House Financial Services Committee last month devoted to the GameStop episode.
A bill sponsored by Rep. Peter DeFazio (D., Ore.) to impose a financial-transaction tax has attracted House Majority Whip James Clyburn, a South Carolina Democrat, as a co-sponsor. The bill has 27 co-sponsors in all, including five who added their names after the Feb. 18 hearing. Further hearings on GameStop are planned later this month in the House and Senate.
In Albany, N.Y., some lawmakers are pushing to revive a New York tax on stock trades that the state hasn’t collected since 1981. Supporters say it would shore up a state budget battered by the coronavirus pandemic, but business groups and the New York Stock Exchange say it could prompt an exodus of financial firms, hurting the state economy. Similar pushback from Wall Street helped scuttle a bill to tax trades in New Jersey last year.
At the federal level, it is unclear whether Mr. Biden would back a transaction tax. The White House has made no formal FTT proposal, and taxing trades wasn’t part of Mr. Biden’s campaign plan. As a candidate, he made contradictory comments on the issue, at one point saying an FTT would hurt the middle class, but later giving an interview where he appeared to endorse the tax.
The president’s team includes some vocal FTT supporters, such as Jared Bernstein, a member of the White House Council of Economic Advisers, and others who have criticized the idea, including Treasury Secretary Janet Yellen. Asked about a transaction tax last month, Ms. Yellen said: “It could deter speculation, but it might also have negative impacts.”
Wall Street and its congressional allies say a transaction tax would make U.S. capital markets less competitive and spur trading activity to shift overseas. They also accuse FTT proponents of making overly optimistic projections of how much revenue such taxes would raise.
“Wherever this has been tried in the past, it has ended up having negative consequences with respect to market liquidity, and it has never raised anywhere near the amount of revenue that was advertised,” Kenneth E. Bentsen Jr. , president of the Securities Industry and Financial Markets Association, said in an interview.
Groups like Sifma warn that brokerages would pass the cost of the tax to investors, and mutual funds would incur the cost of the tax each time they rebalanced. Even though the rate paid on each trade might seem tiny, it could add up to hefty costs over time, industry groups say.
In June, Vanguard Group released an analysis of how various types of transaction taxes would affect an investor putting away $10,000 annually for 40 years. For a portfolio with a mix of stock and bond index funds, Vanguard estimated that a 0.1% tax on purchases would ultimately cost the investor $25,705—or between 2% and 3% of his or her savings, which under Vanguard’s assumptions would grow to $1.2 million at the end of 40 years.
Proponents of a transaction tax say such industry studies are distorted to overstate the impact on Main Street investors. “Financial transaction taxes fall overwhelmingly on the rich,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
It wouldn’t be unprecedented for the U.S. to tax stock trades. The government levied a similar tax from 1914 to 1965. Today, the Securities and Exchange Commission’s budget is supported by a small fee on trades, which brought the agency nearly $2.6 billion in the 2020 fiscal year.
Overseas, dozens of countries have FTTs, including France, Singapore, South Korea and the U.K. The global experience has been mixed: One tax imposed by Sweden in the 1980s led much of the country’s trading volume to migrate elsewhere, while Hong Kong has remained a global financial center despite charging a type of transaction tax called a stamp duty.
Last month, Hong Kong said it would increase its stamp duty to 0.13% from 0.1%, the first increase since 1993, as it confronts a record budget deficit.