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Study: Financial Transaction Tax Is a Tax on Retirement Savers

Practice Management

Framed as a tax on Wall Street, a new study contends that a financial transaction tax in reality would threaten the retirement savings of millions of Americans.

Legislation has been introduced at the federal and state level, including a new bill to implement an FTT in response to the market frenzy over the GameStop stock trades. But according to the latest study from Modern Markets Initiative, an FTT would be nothing more than “a retirement tax” on Americans’ nest eggs and will burden savers at all income levels who invest in securities.

MMI’s report, “A Study of the Effects of a Financial Transaction Tax on Savings and Retirement Security and Risk to Market Stability During COVID-19 Volatility,” reveals that an FTT could result in lost savings of $45,000 to $65,000 over the lifetime of a 401(k) account or the equivalent of delaying the average individual’s retirement by approximately two years. “Our comprehensive analysis plainly displays that the so-called financial transaction tax is really a tax on the savings and retirement of average Americans,” says Kirsten Wegner, CEO of MMI. “The tax, which has been touted by some in Congress as a tax on Wall Street, actually takes aim squarely at Main Street investors.”

In one example, the report examines the impact of the Inclusive Prosperity Act introduced in the last session of Congress by Sen. Bernie Sanders (I-VT), which included, among other things, a 50-basis point tax on equities.  

Here, the report explains that for an initial investment of $10,000 in an average age-based 401(k) plan, the individual saver stands to lose $18,000 over the course of 40 years, or almost 3% of his or her final retirement amount. Moreover, for every $100,000 invested in an average portfolio, which is 80% invested in stocks, and has a turnover rate of 0.5, the saver would be taxed at a 50-basis point rate and owe $200 a year in FTT taxes. According to MMI, this amounts to over $45,000 of FTT for an initial investment of $100,000 shares of stock, compounded over a 40-year working lifespan.

And just reintroduced Jan. 15 by Rep. Peter DeFazio (D-OR) is The Wall Street Tax Act, which would impose a 10-basis point tax on equities, debt and derivatives. Under a tax at this level, MMI estimates that, for an initial investment of $10,000 in an average age-based 401(k) plan, the individual saver stands to lose $15,000 over the course of 40 years, or almost 2.5% of his or her final retirement amount. 

MMI notes that these calculations do not consider high market losses, like in 2008 or 2020, widened spreads and deadweight loss which would further erode the final value of the portfolio.

An FTT would also harm institutional investors who are responsible for the financial savings of many Americans, including pension funds and university endowments, and pooled savings vehicles such as mutual funds, index funds and ETFs, which are continuously rebalanced and hit multiple times by an FTT. 

Here, MMI estimates that an FTT include the following impact on savers:

  • $5 million to $19 million in annual FTT on for an average state 529 College Savings plan with $12 billion AUM, or the equivalent of a year of full in-state tuition for over 440 to 1,900 students at a public university.
  • $840,000 to $24 million in annual FTT for a single public university endowment (depending on AUM), or the equivalent of nearly 3,500 college scholarships each year.
  • Over $75 million to $100 million in annual FTT for the typical state public pension plan with approximately $2 billion to $80 billion AUM.

“We encourage bipartisan support for savings and retirement for Main Street investors during these trying economic times,” adds Wegner. “We invite lawmakers at the federal and state levels to learn more about the negative impact of a retirement and savings tax on Middle Class investors saving for college and retirement.”