Patent self-interest aside, Wall Street has a point, economists say. Even before Sanders formally made his proposal to cancel US$1.6 trillion in student debt and make public colleges free by levying a tax on trading, analysts have warned that it could make markets more volatile and that the costs – much like President Donald Trump’s tariffs – would ultimately be borne by American households.
For politicians looking to burnish their everyman credentials, Wall Street and its billions in profit can be a tempting target. Plans for a financial-transactions tax have been debated by the European Commission for almost a decade, and US lawmakers have revived it in recent months.
While Sanders trails in polls of Democratic presidential hopefuls heading into this week’s debates, he’s fuelling an idea that would threaten to disrupt how everyone from high-frequency traders to pension managers operate.
“In 2008, the American people bailed out Wall Street. Now, it is Wall Street’s turn to help the middle class and working class of this country,” Sanders said in his statement.
Industry groups and experts say the cost of the levy would be shouldered by Main Street investors: either directly as trading houses pass along the expense in higher fees and wider spreads, or indirectly through lower returns in mutual fund and pension accounts.
It’s an argument the industry has made before when facing proposals that could crimp revenue, but outside experts have found it has some merit.
An International Monetary Fund study in 2011 suggested transaction taxes initially target the finance industry, but eventually firms pass on higher costs to customers.
Since about 52% of US households have a retirement account, according to the Federal Reserve, more than double the 22% of households with student debt, Sanders’s plan could end up taxing half the country to forgive debt held by less than a quarter of Americans.
“Can someone tell this guy @BernieSanders that these taxes are paid by mom and pop investors, mutual fund investors, folks with pensions and 401Ks,” tweeted Larry Tabb, founder of research firm Tabb Group LLC.
The potential for higher costs and lower volumes has the financial industry spooked. Lobbying groups for the big banks, HFT firms and asset managers have spent years detailing the downsides of the proposal.
Trading firm Virtu Financial Inc listed a potential financial-transactions tax in between lawsuits and technological changes in the list of risk factors atop its latest annual report.
More than US$1 trillion in stocks and bonds trade on a typical business day in the US, the Congressional Budget Office says, with trillions more in derivatives changing hands daily.
Sales and trading operations and market infrastructure services produced almost US$300 billion in revenue in 2017, according to McKinsey & Co.
The Vermont senator’s proposal would tax stock trading at 50 basis points and bond trading at 10 basis points and apply a half-basis-point tax on derivatives transactions.
The estimated US$2.4 trillion in revenue it would raise would then be used to cover the US$2.2 trillion cost of eliminating all US student debt and undergraduate tuition and fees at public colleges, according to Sanders.
That revenue figure is up for debate. A 2017 study published by the European Central Bank found that a tax on equity trading in France decreased trading volume by around 10% and fell short of generating expected revenues.
A financial-transactions tax of 10 basis points would generate US$777 billion of additional revenue over the next decade, the Joint Committee on Taxation said last year.
The tax would probably increase volatility, and increase the Treasury’s cost to issue debt, according to the Congressional Budget Office. Household wealth also would decline with the decrease in asset prices, which could lower consumption.
What Bloomberg Intelligence Says
Applying taxes to stock, bond and derivatives trades could also change investor behaviour, according to Andrew Silverman, a Bloomberg Intelligence government analyst.
“Fifty basis points on stock trades would severely crimp liquidity!” said Steve Sosnick, chief strategist at Interactive Brokers. Market participants might move to options for the lower tax rate, making them more liquid than the underlying stock, he said.
“A tail that wagged the dog that much would become very unstable.”
The economic threat of increasing student debt has become a hot topic on the campaign trail, and Sanders’s Democratic rival Elizabeth Warren has also introduced a plan to forgive outstanding loans.
Student debt loads have tripled since 2007, eclipsing car loans and credit cards as Americans’ second-largest source of household debt behind home mortgages, Federal Reserve data show. About 1 in 9 borrowers is at least 90 days late on payments, the highest delinquency rate among any form of household debt, according to the Federal Reserve Bank of New York.
Policy makers such as Federal Reserve Chairman Jerome Powell and executives such as JPMorgan Chase & Co Chief Executive Officer Jamie Dimon have worried aloud that young Americans’ indebtedness is hurting the housing market, where most Americans build their wealth.
Blackstone Group Executive Vice Chairman Tony James is pushing for a new model of financing college that does away with student loans.
Still, that didn’t generate much appetite for Sanders’s plan on Wall Street.
“Every time a significant transaction tax has been tried, it has either been gutted or eliminated due to its failure to collect anything close to projected revenue and its impact on capital markets,” tweeted Dave Weisberger who’s held senior trading roles at firms including Two Sigma Securities and Citigroup Inc.