This would mean that some of the cost associated with an FTT would be borne by the owners and highly paid employees of the financial institutions conducting these trades. Because trading volume is relatively elastic, or reactive to changes in price, research suggests an FTT would reduce the volume of trades and potentially disincentivize the unproductive trades that produce some of the financial industry’s profits. Īn FTT would discourage this churning by marginally increasing transaction costs. For example, financial assets held with Vanguard are traded less and therefore subject to lower fees than assets held in other investment companies, and yet Vanguard funds do not differ in performance when compared to others. There is evidence that some transactions in today’s market merely churn assets, generating fees for financial institutions without representing any novel investment. An FTT would reduce demand for trades, which generate fees for these institutions. On the other hand, part of the cost of an FTT could be borne by those who own financial institutions (as shareholders or partners) or work for them. Reduction of Unproductive Trades Would Also Result in a Progressive Tax and Reduce Inequality By comparison, the bottom 60 percent owned 1.8 percent of stocks, meaning a tax on stocks would be well targeted at the wealthiest Americans. In 2016, the wealthiest 10 percent of Americans owned 84 percent of stocks. Īnd because financial assets like stocks, bonds, and derivatives are so concentrated in the hands of the wealthiest Americans (see graph), an FTT would be ultimately borne mostly by the wealthy. While financial institutions may directly pay an FTT, the tax could be passed onto investors as increased transaction costs or the choice by investors to forego trades that would otherwise be profitable, which would reduce the value of financial assets. FTT Costs Passed onto Investors Would Make the Tax Progressive and Reduce Inequality Since this is likely to be a relatively wealthy group of people, in this case, too, an FTT would reduce inequality.īoth of these scenarios are described further below. In this case, an FTT that reduces trades would actually create savings for investors and the costs would be borne by those who own financial institutions (as shareholders or partners) and those who work for them. Instead, it is engineered only to generate fees for financial institutions, as explained further on. However, the second scenario could come about because there is evidence that a portion of today’s trading in financial assets is not in the interest of investors. In this case, an FTT would reduce inequality because most financial assets are held by the wealthy. ![]() ![]() A tax on these trades and the resulting reduction in trades, therefore, creates a cost for investors. The first scenario assumes that trades of financial assets are in the interest of investors. In either scenario, an FTT would be a progressive tax. In another possible scenario, some investors could save money and at least a portion of the tax would ultimately be borne by the owners and employees of financial institutions that carry out trades. In one scenario the costs would be passed on entirely to investors. Curbing InequalityĪn FTT would raise the costs of trading financial assets, resulting in fewer trades. How policymakers design the tax matters a great deal for its effectiveness and revenue impact. This, combined with the investments that could be financed with an FTT, could reduce income inequality and wealth inequality. The people most likely to bear this cost are disproportionately well-off. But because the volume of financial transactions is so vast, these proposals would nonetheless raise hundreds of billions of dollars over a decade, even accounting for the reduction in trades that would likely result. ![]() Most proposed FTTs would apply to trades at what appear to be very low rates, such as 0.5 percent, 0.1 percent, or much less. ![]() A number of countries already have full or partial FTTs, and the idea of imposing a comprehensive, broad-based FTT on trades of most types of financial assets has become more attractive both in the U.S. A financial transaction tax (FTT) has the potential to curb inequality, reduce market inefficiencies, and raise hundreds of billions of dollars in revenue over the next decade.Īn FTT is a type of excise tax imposed on trades of financial assets, including stocks, bonds, and derivatives.
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