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1 Colin Miller & Anna Tyger, The Impact of Financial Transactions Tax 1 (2020)

handle is hein.taxfoundation/imfttx0001 and id is 1 raw text is: The Impact of a Financial Transactions Tax Colin Miller Programmer and Analyst Anna Tyger Research Assistant Key Findings The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and global levels. We are a 501(c)(3) nonprofit organization. @2020 Tax Foundation Distributed under Creative Commons CC-BY NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org * A broad-based financial transaction tax (FTT) in the United States would be a substantial revenue source. For example, the Inclusive Prosperity Act proposed by Sen. Bernie Sanders (I-VT), with an FTT levied at 0.5 percent on stocks, 0.1 percent on bonds, and .005 percent on derivatives, has been estimated to raise between approximately $60B and $220B annually. * An FTT would raise both explicit and implicit transaction costs, decreasing trading volume and lowering asset prices. The decrease in trading volume would reduce the revenue raised by the tax. It is difficult to predict the magnitude of this reduction. As a result, many existing FTTs have missed revenue targets. * Depending on the design of the tax, derivatives could potentially be substituted for their underlying securities to avoid the tax, reducing the revenue the tax raises. * An FTT would fail to meet its goal of discouraging risky financial activity. Due to the higher transaction costs, investors and institutions would be incentivized to avoid rebalancing their portfolios and leave risk unhedged. Furthermore, investors and institutions moving to derivatives to avoid the tax would face additional risks associated with trading those instruments. * The existing literature is inconclusive as to whether an FTT would increase or decrease volatility. Higher volatility leads to lower compound returns and increased risk for investors. * An FTT would substantially reduce high-frequency trading (HFT). HFT has contributed to declining transaction costs. It can increase volatility and some high-frequency traders have engaged in predatory activity; however, it is unlikely that these concerns have significant implications for investors or that an FTT is the best way to address them. * An FTT would increase the cost of capital, reducing both owners' returns to capital and workers' returns to labor. As a result, the level of GDP would be reduced under an FTT. FISCAL FACT No. 690 Jan. 2020

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