Taxes

Be Skeptical About Bernie Sanders' Financial Transactions Tax

Nonpartisan and center-left groups are casting doubt on the Vermont senator's revenue estimates.

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Taxing financial transactions is a popular proposal among Democrats to fund new government programs—but some on the center-left have called into question how much revenue such a tax would generate.

Democratic presidential candidates Sen. Bernie Sanders (I–Vt.) and Sen. Kirsten Gillibrand (D–N.Y.), along with several other members of Congress, have introduced a bill that would tax financial transactions. It would levy a tax of 0.5 percent on stock trades, 0.1 percent on bond trades, and 0.005 percent on derivatives trades. Sanders promises that this new tax will raise $2.4 trillion over the next decade, citing a study from University of Massachusetts economists; he plans to use that revenue to fund free college, student loan debt forgiveness, expanded Pell Grants, support for historically black colleges and universities (HBCUs), and increased investment in K-12 education. 

Sanders says the bill will help "rein in the recklessness of Wall Street billionaires and build an economy that works for all Americans."

But even if you buy that premise, there are plenty of questions about how effective a financial transactions tax would be in raising revenue. 

As senior fellow Howard Gleckman of the center-left Tax Policy Center wrote recently, Sanders proposed a similar financial transactions tax (FTT) in 2016, and some economists promised it would generate almost $3 trillion in tax revenue over a decade. Meanwhile, the Tax Policy Center found that the tax would raise only $400 billion over ten years. Why the difference? The Tax Policy Center estimated that the tax would dramatically reduce the number of transactions on financial markets, reducing both the FTT's tax base and revenue from taxes on realized capital gains. By raising transaction costs, fewer investors will sell stocks, which means less taxable capital gains income.

The Congressional Budget Office's (CBO) analysis mirrors the Tax Policy Center's, estimating that a FTT similar to the one Sanders proposed would raise under $800 billion over a decade. The CBO has also reported that FTTs pose a threat for public finances of federal, state, and local governments, by reducing liquidity in the bond market and increasing costs faced by pension programs.  

Other countries' experiences with FTTs suggest that it is right to be skeptical about Sanders' claims. When Sweden implemented the tax, 60 percent of transactions on Sweden's stock market moved to other countries, and as a result, overall tax revenue actually went down. Not only did the FTT not raise as much revenue as hoped, but moving stock market transactions to other countries and increasing transaction costs also reduced revenue from taxes on capital gains.

This debate, between firebrand progressives and the more moderate center-left, mirrors a recent back-and-forth about fellow presidential contender Elizabeth Warren's wealth tax.

Both the wealth tax and the financial transactions tax are appealing revenue sources to progressives, as they both target clear villains: wealthy heirs and greedy Wall Street traders. Both taxes seem deceptively modest, with a seemingly low tax rate: Warren often calls her wealth tax proposal "the two-cent tax" on the "tippy-top.

But the problem with this framing in the case of the FTT, as Nicole Kaeding, the nonpartisan Tax Foundation's vice president of federal projects, points out, is that a very low tax rate that promises to raise a lot of revenue is probably a result of "tax pyramiding," or the taxation of the same money over and over again.

As Reason's Peter Suderman wrote, to pay for their extravagant spending proposals, Democratic presidential candidates wouldn't be able to rely on these targeted tax hikes on the super-rich. Instead, they'd have to tax like Scandinavia, which would mean major tax increases across the middle class. Bernie himself admitted that the middle-class would have to pay higher taxes at the most recent Democratic debate.

It's worth noting, too, that the FTT wouldn't just hit Wall Street traders. It would hit middle-class retirement savings and local pension programs. By raising the cost of investment, it could reduce long-run economic growth. All that, and it would probably fall short of raising the promised revenue, too.

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  1. So let me get this right….Every middle-class American who contributes to a 401K would get tagged with this 1/2% tax every time they contribute. This is utter lunacy.

    Yeah Bernie (and the two dozen other Dems currently running), go ahead: Please run on that platform in 2020.

    1. That’s right; all those millionaire hourly workers with their ill-gotten 401K programs, trying to save despite massive payroll taxes, will FINALLY have to pay their fair share.
      Vote for the democrat that lies and says he is an independent.

      1. Longtobefree…Now we will see if Einstein was right when he said, “Intelligence is finite, but stupidity is infinite”. It would be economic and political suicide for the Left to adopt this as a plank to run upon.

    2. Yeah but so would union pension funds, so lose-win.

      1. “Yeah but so would union pension funds, so lose-win.”

        Remember how Obama gave unions waivers to protect them from Obamacare?

    3. The Tax Policy Center estimated that the tax would dramatically reduce the number of transactions on financial markets, reducing both the FTT’s tax base and revenue from taxes on realized capital gains.

      And that’s by design – in Bernie’s own words to “rein in the recklessness of Wall Street billionaires.” It’s based in the belief that there is too much trading happening too quickly in the stock market and that this drives a near-term focus that is destructive to society.

      As a revenue strategy, it’s similar to the logic that says high taxes on tobacco products both discourage smoking and increase revenue.

      1. That wasn’t supposed to be a reply to Atlas_Shrugged.

    4. A 401k is an alternative to Social Security, and Bernie doesn’t want the program to have competition

    5. Not just when they contribute – every time that 401K makes a trade.

      1. Mr. Abattoir – I didn’t think of that. I assumed the tax was imposed when you moved money into or out of a mutual fund. Adding 0.5% to the existing management fee is bad enough. But, it looks like the tax will be also imposed when assets are bought and sold inside the fund. In a fund that does a lot of internal trading, the tax could outsize the management fee.

        1. It’s a major blow to actively managed funds. Even with a large index fund or a pension fund – when they do trade, it generally involves millions of dollars.

          1. Exactly. And when you consider that most people are already paying around .5-1% on management fees…it’s a pretty bad price hike, especially since we would be penalizing mostly low and middle income Americans saving for their retirement. Great way to incentivize premature distributions and wasteful spending!

      2. Unicorn….OUCH! You are correct. Funds frequently execute intra-family trades (trades btwn funds in a mutual fund house). Whooo boy, that is a lot of trades.

        Yep, go ahead Democrats. Please, please, please run on that policy plank! The 2020 election will be over if that is ever adopted. It would be totally suicidal.

    6. Heh, I figure one of the other 2020 candidates will try to one-up Bernie: “On my first day in office, all of the funds currently in 401(k) accounts will be transferred to the Treasury and redistributed. You didn’t build that!”

    7. Bernz reminds me of the guy in Mallrats who just couldn’t see the sailboat.

    8. Funny that a large chunk of the voting public are filthy capitalists. Even if they do not think of themselves that way.

    9. And every middle-class retiree who makes a withdrawal or has a mandatory distribution would get tagged with this tax. So would every college student pulling money out of her 529 plan or educational IRA.

      Unless, that is, they start writing exceptions into the law – in which case, it will become another loophole-filled mess that only raises revenue for CPAs and other professional tax preparers.

  2. This type of stuff is why Sanders has never been in my top tier of 2020 candidates. Probably because he’s so old, he’s still stuck in the outdated paradigm that says Democrats have to fight against “the rich.”

    I prefer younger, more modern Democrats who proudly work on behalf of the rich. Like the Democrats who are moving the party toward the open borders position that’s so popular with American billionaires.

    1. Eh, you really expect to trick the newcomers with this?

      Its too obvious.

  3. Bernie Sanders (actually D not I) lied? Say it ain’t so.
    Next you will try to get me to believe that a socialist owns many houses that he does not share with the homeless, and has million dollar book deals which he also does not share.
    “Socialist: I do not think that word means what you think it means”

    1. Socialists are like the suicide pact of charity. “I’ll only help my fellow man if EVERYONE has to help their fellow man. Otherwise I’m just a sucker.”

      Meanwhile, people who actually care about their fellow man just give their money away. Like lots of rich people do. Bill and Melinda Gates, for instance.

  4. “ It’s worth noting, too, that the FTT wouldn’t just hit Wall Street traders. It would hit middle-class retirement savings and local pension programs.”

    But the Bernie Bros have forsaken such things as “saving” and “investing.” That sounds like “work”.

    They will spend their days as baristas, spending all their pay and whining about “the man”, while they wait to see what the Bernie Bureaucracy will bestow them.

    I wish them luck.

    1. I wish them luck.
      I wish them cancer. But that’s just me being me.

      1. Cancer is too slow…

  5. Instead, they’d have to tax like Scandinavia

    Look at our deficits, our debt, and our welfare state: we already have to tax like Scandinavia; problem is: we don’t.

  6. Hey, Bernie, if you want to be useful and “rein in” something, how about a 10 cent tax on every robocall?

    1. That tax may reduce robocalls; better make it a dollar to be sure enough revenue gets raised.

  7. “Warren often calls her wealth tax proposal “the two-cent tax” on the “tippy-top.” ”

    In response to comments like that, it is worth remembering that the federal income tax was also supposed to be a 2% to 4% tax on the “tippy top” that was never, ever going to be applied to wages and salaries. We saw how long that lasted.

    1. “We don’t want smoking in here, so we’re going to create a smoking section.”

      10 minutes later.

      “Actually, we don’t want smoking the restaurant, but you can smoke at the bar.”

      10 minutes later.

      “Actually, we don’t want smoking indoors at the restaurant at all, if you could step outside that would be great.”

      10 minutes later.

      “Actually, we don’t want you smoking near the entrance, if you could head down the street to the park.”

      10 minutes later.

      “Actually, we don’t want you smoking in a public park, you’ll have to do it at your home.”

      10 minutes later.

      “Actually, smoking in your apartment affects your neighbors…”

      That’s why it’s called “progress”.

  8. he plans to use that revenue to fund free college, student loan debt forgiveness, expanded Pell Grants, support for historically black colleges and universities (HBCUs), and increased investment in K-12 education.

    If you’re funding free college, why do you need to expand Pell grants and support HBCUs??

    1. If you’re funding free college, why do you need to expand Pell grants and support HBCUs??

      To cover the fees that will be necessary to keep the colleges free, of course.

      1. So you somehow found out how CA free colleges require student loans?

  9. I’m not sure what’s worse; that he would propose such a tax in the first place, or that he immediately assumes all of the increased revenue should be new spending. It really makes any of the Democrats’ arguments against tax cuts increasing deficits blatantly laughable.

    1. And make no mistake – the money will be spent long before they realize their revenue projections were way short.

      1. They know the projections are short, they just have to sell it somehow

  10. “and increased investment in K-12 education.”

    Since when is spending money you don’t have considered an investment? And if spending more money on schools is a good thing, why is more spending on health care bad?

    1. I hate how “investment” is used now for government spending. Investments are where you get an ownership stake in something and have some possibility of a financial return. That’s not what government spending is. Maybe we do need to spend that money. But don’t pretend it’s an investment.

      1. I hate how “investment” is used now for government spending.

        It’s tied in with the “multiplier effect” myth about government spending – i.e. the belief that if the government spends $10k in a community that all the new economic activity that generates will return more than $10k to the government in taxes. If more spending = more revenue, then it’s fair to call it “investment.”

        It’s bullshit magical thinking of course, but there it is.

        1. Multipliers prove deficits don’t exist. QED.

          1. Well, if you multiply the deficit by zero…

        2. “i.e. the belief that if the government spends $10k in a community that all the new economic activity that generates will return more than $10k to the government in taxes.”

          So let the people who earned the money spend it instead, and create all that new economic activity. Then those mouth-breathing bureaucrats aren’t needed to spend that $10k, and you can fire them. Freeing up their salaries for a tax cut, leaving the people more money to spend on new economic activity, which leads to…

          Lather, rinse, repeat.

          1. When normals spend money, it disappears.

      2. I hate how “investment” is used now for government spending. Investments are where you get an ownership stake in something and have some possibility of a financial return.

        The state owns your children and in return, they get tax revenue from them when they become taxpayers.

  11. “…he plans to use that revenue to fund free college, student loan debt forgiveness, expanded Pell Grants…”

    If college is going to be free, who needs Pell Grants?

  12. The other day I transferred a bunch of equities into bonds because I’m preparing to put a down payment on a new monocle in 2020, I probably wouldn’t have done it if I had to pay a tax on the transfer. Why do socialists always think that when you tax an activity, that activity will continue to occur at the exact same level that it did before the tax was enacted?

  13. I’m waiting for Comrade Bernie to introduce an exhaling tax.
    It will complement his proposed inhaling tax.
    No one would be exempt, and he’s only asking 49% of your pay on both taxes.
    Only the dead would be exempt.
    I not only consider that fair but judicious as well.
    What could possibly go wrong?

    1. Rich people would exhale a lot more, and accelerate global climate warming change to the point the world would end a week ago last Thursday.
      That would make AOC look bad, which would make socialists look bad, so Bernie won’t propose that until AOC has had her two terms.

  14. “Be Skeptical About Bernie Sanders’ Financial Transactions Tax *each and every thought* “

  15. Another idiotic article arguing over semantics. So fucking what if it raises “only” $400 billion? Start taxing the holy shit out of all the stock markets in as many was as possible, and cap interest rates to the prime rate plus 3% or something. Usury laws need a come-back.

    1. Why bother with half measures like taxing the stock market? Just confiscate all private investments and be done with it. What could go wrong? Certainly you aren’t afraid the owners would shrug, are you?

    2. this guy sounds like he’s off his meds

    3. So fucking what if it raises “only” $400 billion?

      Because he thinks he’s going to raise trillions, and so he’s going to spend trillions. That’s why it’s a problem that he’s only actually going to raise $400 billion, maybe.

      Start taxing the holy shit out of all the stock markets in as many was as possible

      And watch while corporate income tax revenues dry up, people get laid off (and income tax revenue dries up) and prices rise because there are fewer produces. Recipe for greatness, right there.

      cap interest rates to the prime rate plus 3% or something

      And watch your ability to get a loan for pretty much any purpose evaporate. Like your credit cards and the flexibility they give you? Tough shit. Like the fact that that you can get a loan to buy a house you don’t have cash for right this instant? See the answer to the previous question.

    4. Lets screw the elderly out of their pensions and send them out in the streets to beg.

      The left paints a picture of a stock market investor as a big shot billionaire. In reality, the median income for a stock market investor is probably less than $100k per year. That is because tens of millions of working class people use the stock market to save for their retirement.

  16. Oh, they love their financial transactions tax. It’s like a panacea, just as dumb, and even more insidious than a national sales tax.

    The argument goes: get rid of all the other taxes which currently raise $3 trillion, and replace it with a tiny 1 cent tax on every financial transaction. Every time a deposit, withdrawal or transfer is made, 1 cent fee. And it’ll raise $4 trillion. No more income, death, sales taxes, etc., all gone. Just one little tax, deducted automatically, and 33% more revenue will be generated.

    And their chubby little faces glow with pride at having accomplished such a feat of ingenuity.

    Then you tell them the problem is the extra 33% revenue. Confusion. How can that be a problem? they object. It’s only a 1 cent tax on every transaction! And all other taxes gone!

    But you’re now taking an extra trillion out of the economy and putting it in government coffers. Why not just raise all other taxes to generate that extra trillion? Either way, the economy has a trillion less. How is that a good thing?

    This is where the conversation usually breaks down into real idiocy and they reveal their true motivations, usually something along the lines of it being a hidden tax, subtle in its operation, applicable to wide range of activities, which all amount to being a cunning ruse to grab as much as possible without folks realising it.

    But the never really grasp why the extra trillion is the actual problem. All that matters is it was only 1 cent and an extra trillion resulted.

  17. “Be Skeptical about anything that comes from Bernie Sanders”. No need to write an entire post on this guy. For sanity sakes, the guy likes the idea of bread lines and soviet style central planning.

  18. The London Stock Exchange is very pleased to hear about this proposal.
    Please feel free to contact us regarding moving your accounts.

  19. The article noted how a transaction tax moved 60% of transactions out of the country. I guarantee that wasn’t normal every day folks saving for retirement. In the end along with Bernie’s Mediare for All program will screw the middle class.

  20. I can’t believe such odious ideas can cone out of America. Europe sure but the USA? Pretty weenie.

    As for this tax hurting the middle class, it’s hard not think they know it will. Or they’re that ignorant and sinister.

    Democrats have their fair share of loons.

  21. Does anyone really care about crazy Bernie any more. He is currently running in 4th place and never really stood a chance. He was too late to adopt the identity politics of the other candidates which seem to be a pre-requisite of the Dems now.

  22. Serious question; does Bernie have any financial ties to tax attorneys or advisory firms? Because people will want to know how much they’re losing on every transaction and none of these financial firms can bear the cost or the risk of providing tax advice…

  23. Hey Bernie, let’s fund college tuition with the budget surplus (once the debt is paid off, of course).

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