I share my fellow Democrats’ concerns about income inequality and the need for a fairer tax system. But the presidential candidates would do well to drop one of their talking points: a financial transaction tax. Sen. Bernie Sanders has long supported an FTT, which he calls a “tax on Wall Street speculation.” Sen. Elizabeth Warren has also endorsed the idea. But former Vice President Joe Biden says it would “impact investments held by middle-class Americans.”
Mr. Biden is right. It’s simply wrong to think of the stock market as the exclusive preserve of the wealthy. It’s a reliable engine of investment returns for the middle class. More than half of Americans own stock, directly or indirectly through mutual funds. They would suffer if Mr. Sanders’s version of the FTT—which would levy a 50 basis-point tax on all equity trades, 10 basis points on bond trades and 0.5 basis point on derivatives trades—became law.
Sweden repealed its FTT in 1991 after 50% of its trading volume migrated to London. Various European Union officials have tried to institute such a tax, but they’ve been unable to do so because the tax would be difficult to implement and could slow economic growth. In the U.S., we’ve already tried the FTT. Congress enacted a stamp tax on trades of stocks and bonds in 1914, but it was scrapped in 1965 because it produced little revenue and slowed growth.
The economic case against the tax is persuasive, too. According to a study of Mr. Sanders’s proposed FTT by Georgetown economist James Angel, the tax could reduce retirement savings by as much as 8.5% over a typical worker’s lifetime. These significant losses for ordinary investors may be one reason why the Obama administration’s economic team, which considered proposing its own FTT, ultimately decided against it.