Recently, the subject of a financial transactions tax came to the forefront of Congressional proposals for new legislation. The tax – denominated a “miniscule” 0.01% – is touted as a way to raise hundreds of billions of dollars in new taxes for the government to spend on various pet projects. Experience tells us that the applicable rate will not remain at the proposed initial low rate of one basis point and will no doubt gradually increase over time.
Additional factors argued to support the proposed tax include the desire of Congress to rein in high frequency trading and similar transactions by large investors and a claim that “fairness” would require such a tax since there is no sales tax currently imposed on financial transactions.
What will happen, of course, is that investments by people who are by no stretch of the imagination rich and who do not and cannot engage in high frequency trading will be subjected to this tax. Although the tax would also apply to institutional and other large investors, it seems likely that they will pass the costs on to individual investors or develop other workarounds. When one considers that this proposal means taxing every contribution an individual makes to one’s qualified retirement account as well as each rebalancing event in the account, it becomes evident that this tax over time will have an undoubted impact on these small savers as well as the large accounts which are ostensibly the primary target of the tax.
Even more discouraging is the fact that the government is moving to force workers to contribute to retirement plans containing investments selected by the government and then taxed at the outset and every step along the way. Once again, government taxation will not be progressive but instead will burden all investors and not just the “rich”. There is likely to be a better way and our next blog will suggest one possible approach.