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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