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Financial Transaction Tax Would Put ‘Main Street Investors’ at Risk

Industry Trends and Research

A new analysis by Vanguard finds that a financial transaction tax (FTT) would hinder millions of American investors, including Main Street families saving for retirement. 

The study reveals that the everyday impact of a 10-basis-point FTT would require an average investor to work nearly 2½ years longer before retiring in order to reach the same retirement savings goals achievable without the tax. “An FTT generates a substantial drag on investment returns as the tax cascades and compounds over time. The real-world implications for investors, including those investing in retirement accounts, are sobering,” the firm warns. 

Vanguard further advises that such a tax would make saving for college more difficult as well. The analysis finds that it would increase the burden families face when saving for college by an additional $7,800 in loans to make up the difference. Viewed another way, parents would need to save an additional $250 per year, per child, to achieve the same balance in a college savings account. 

Vanguard’s analysis comes as various presidential candidates and Democratic lawmakers have floated several proposals for a financial transaction tax, first offering them to limit purported speculative trading and later repurposing them to help pay for pet projects. One of the latest iterations comes from Democratic presidential candidate Sen. Kamala Harris (D-CA), who has proposed an FTT to pay for a “Medicare-for-all” proposal. Similarly, Democratic presidential candidate Sen. Bernie Sanders (I-VT), along with several cosponsors, has proposed an FTT with different rates to help pay for a cancelation of all student loan debt. 

Diminished Savings

Even outside of saving for retirement or a college education, Vanguard further emphasizes that an investor’s ability to save for any future goal is “drastically diminished” by the proposed tax. 

The analysis shows that the ending value of an investment of $10,000 in a small-capitalization active equity fund after 20 years would be reduced by 19% – or nearly $6,000 – with the proposed tax, from $32,071 to $26,082. This assumes a 6% compounded return and 109-basis-point annual impact of an FTT, which includes transaction costs that would be incurred due to fund turnover and the estimated impact the FTT would have on market spreads and liquidity.

Vanguard’s analysis further warns that the harms caused by FTTs extend beyond investors. The firm notes that other countries – particularly in Europe – have shown that FTTs distort capital markets. “FTTs generally increase risk in the financial system by hurting market liquidity, producing volatility, increasing bid-ask spreads, encouraging financial engineering, and raising costs of capital,” the firm says. 

What’s more, FTTs have “consistently failed to deliver the promised tax revenues” because FTTs shift financial activity to less-regulated markets, Vanguard emphasizes. For example, the firm notes that France and Italy did not raise even half the first-year revenue they had projected from the FTTs they enacted in 2012 and 2013, respectively.

To help bring attention to this critical issue, American Retirement Association CEO Brian Graff in March authored an article in The Hill, a popular news source for many on Capitol Hill, decrying the proposed financial transaction tax and arguing, among other things, that the Wall Street Tax Act is an attack on American workers who are investing for their future in their 401(k).