Sen. Bernie Sanders' proposed financial transactions tax would likely hurt millions of defined contribution plan participants, defined benefit plan sponsors and beneficiaries.
As part of his campaign for the Democratic nomination for the presidency, Mr. Sanders has revived a tax proposal that has been floating around Washington for many years, but which has never advanced beyond bills sponsored by a few Democrats in Congress.
The Vermont senator proposes instituting a 0.5% tax on stock transactions, 0.1% on bond transactions and .005% on derivative transactions, using the proceeds to cancel the nation's $1.6 trillion in outstanding student debt. He also said the tax would provide states with $48 billion annually to eliminate undergraduate tuition and fees at public colleges.
Mr. Sanders argues the tax would eliminate student debt and boost the economy by turning students into consumers who would spend on goods and services.
But he ignores the damage such a tax could do to the economy. Economists agree that when you tax something you get less of it, and some argue a transactions tax would reduce trading and price discovery, thus reducing market liquidity and discouraging investment.
In a paper published in the National Tax Journal in June 2016, six economists at the Urban-Brookings Tax Policy Center estimated that Mr. Sanders' proposed 0.5% transactions tax would raise just $305 billion over the fiscal years 2017 to 2026. That's nowhere near enough to finance his proposals.
The economists noted that 80% of the burden would fall on the owners of capital including pension funds, foundations, endowments, 401(k) plans, etc. It also would lead to a decline in asset values that would, at least initially, be borne by existing asset owners — 401(k) participants would take a hit on their assets and pension fund sponsors would see their funded status worsen.
Perhaps these considerations explain why financial transactions tax proposals have not progressed in the past.
Financial services industry executives should ensure that these issues are recognized if Mr. Sanders' proposal should reinvigorate consideration of such a tax.
