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Retirement Savings Would Be ‘Hit Hard’ by Financial Transaction Tax


Recent bills introduced in Congress to impose a financial transaction tax (FTT) would have a drastic effect on retirement savings and many other aspects of the U.S. economy, argues a new white paper. 

Drafted by James Angel, Ph.D., Associate Professor of Finance at Georgetown University on behalf of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC), the paper contends that instead of the burden falling on Wall Street, the real impact of an FTT will be on ordinary investors, such as retirees, pension holders and those saving for college. 

“They will pay the tax directly when they trade and pay it again as financial intermediaries pass on the taxes they face as a cost of doing business. FTTs are not actually a tax on financial intermediaries; they are a tax on investors,” Angel writes in the paper, “Financial Transaction Taxes: A tax on investors, taxpayers, and consumers.” 

The 40-page paper also explores the potential impact an FTT would have on capital markets such as the securities that support the housing market, operations of businesses and infrastructure financing. It was released Sept. 16 at a briefing on the Senate side of Capitol Hill. 

“The Financial Transaction Tax is a tax on retirement and savings. This hits Main Street, not Wall Street. Presidents Kennedy and Johnson wisely repealed the tax and ushered in a new era where 50% of Americans are now invested in our capital markets,” explained U.S. Chamber Center for Capital Markets Competitiveness Executive Vice President Tom Quaadman. 

Other participants at the briefing included Peter Roberson, Vice President of Legislative and Regulatory Affairs with Charles Schwab & Co.; Terry Campbell, Vice President of Global Government Relations at Nasdaq OMX; and Andrew Remo, Director of Legislative Affairs with the American Retirement Association. “It is clear from Professor Angel’s paper and other research that a financial transaction tax would have an insidious impact on the retirement savings of regular working Americans,” Remo noted during the briefing. 

FTT Impact

While several proposals have been put forward recently by various Democratic lawmakers and presidential candidates, the paper appears to take particular aim at a proposal by Sen. Bernie Sanders (I-VT) to tax financial trades at a rate of 0.5% for stocks, 0.1% for bonds and 0.005% for derivatives.

Angel notes that under the version of the tax proposed by Sanders, a typical retirement investor will end up with 8.5% less in his or her 401(k) or IRA after a lifetime of savings. He explains that if a worker saved $1,500 each year for 46 years and earned 5.0% annually in a fund, the worker would accumulate $239,550 by age 67, but if the return were reduced because of Sanders’s FTT, the accumulation drops to $219,277, a reduction of $20,273 or 8.5%. “In dollar terms, the average IRA investor would have $20,000 less at retirement as a result of this tax,” Angel notes.   

“Mechanically, the tax would take an immediate haircut off an American worker’s hard-earned retirement savings each time she contributes to the 401(k) plan, which typically occurs after each pay period – 26 separate transactions per year if a worker gets paid during a two-week period,” Remo emphasizes. 

Similarly, the paper argues that the transaction taxes paid directly and indirectly by mutual funds will increase their costs and decrease returns to investors, harming mutual fund investors such as 401(k) participants saving for retirement. Angel further observes that transaction taxes paid by pension funds will reduce their returns, worsening existing problems with underfunded pensions and making it more costly for governments and private sector employers to provide pensions.

Modern Markets Initiative 

Meanwhile, a recent report by Modern Markets Initiative also analyzes the economic impact of the FTT included in Sen. Sanders’s Inclusive Prosperity Act of 2019 (S. 1587), which was first touted as a way to deter high-frequency trading. Among other things, “A Study on the Effects of a Retirement Tax/Financial Transaction Tax on Retirement Security, College Savings and University Investments” finds that the tax would be a “major blow” to pensions, university endowments, retirees and families saving for college. 

According to the analysis, the FTT would cost: 

  • $64,200 over a 40-year lifetime savings in 401(k)s and IRAs or the equivalent of delaying the average individual’s retirement by two years;
  • $19 million in annual FTT on Section 529 college savings plans, or the equivalent of a year of full in-state tuition for 1,900 students at a public university; 
  • $24 million in annual FTT for a single public university endowment with $20 billion AUM, or the equivalent of 3,227 college scholarship in a given year; and 
  • $132 million in annual FTT for the typical state public pension plan with more than $68 billion in AUM. 

“Our in-depth analysis shows that the FTT that has been presented by some politicians in Washington as a ‘pound of flesh from Wall Street’ is in reality, a severe retirement tax on American savers from all income levels,” notes MMI CEO Kirsten Wegner. “It is truly ironic that the FTT would actually hurt the very same people that the proponents of the tax aim to help.” 

A recent analysis by Vanguard similarly 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.