"Robin Hood Tax" Aims for Free College Education at Wall Street's Expense

By Markets Fool.com


Source: Flickr user Holmes Palacios.

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For more than 400 years, children have heard tales of Robin Hood, a fictitious outlaw who lives in Sherwood Forest and fights for the common folk. Laws don't mean much to Robin, who steals from the oppressive rich and redistributes their wealth to the disadvantaged commoners of Sherwood Forest.

Earlier this week, U.S. Senator and Democratic presidential candidate Bernie Sanders (I-Vt.) donned his own figurative feathered cap and took aim with his metaphorical bow at Wall Street when he proposed two groundbreaking bills, collectively known as the "Robin Hood Tax."

A potential free ride in college
The goal of Sanders' bills is twofold. The first bill seeks to pay 100% of the undergraduate tuition fees of college students, expand work-study programs, and help reform the student loan system, which has left Americans with a whopping $1.2 trillion in loans outstanding. This crippling debt can adversely affect graduates' pocketbooks, their ability to save, and even their long-term health via stress.

Source: Flickr user Nazareth College.

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If undergraduate education in the United States were free, it would put this nation on par with a number of European economies -- such as France, Germany, and the three Scandinavian countries, Norway, Sweden, and Finland -- that offer free college education to their undergrads. Presumably, it would also incentivize students to learn high-demand skill sets, which could land them high-paying jobs.

A college education has become all but necessary to career advancement in the U.S., as employers are looking for a more specialized workforce. As the Pew Research Center noted last year, the median salary for a full-time millennial aged 25 to 32 with a bachelor's degree or higher was $45,000 in 2012 dollars. By comparison, a high school graduate was earning a median of $28,000 for full-time work in 2012 dollars. Over a lifetime, especially given workers' ability to save and invest, the difference is night and day.

A boost in social resources
The second bill proposed by Senator Sanders looks to reinvest in American families through a number of social pathways.

Source: Bernie Sanders via Facebook.

Funds generated by the bill (we'll get to how that would work in a moment) would be funneled back into communities to help fight HIV/AIDS, the deadliest global infectious disease. In addition, revenue generated from these bills would also be used to help the unemployed find work, to assist the poor who may be having trouble making ends meet, and to help low-income Americans find affordable housing.

The idea here would be to reduce the income inequality gap for the impoverished and potentially improve their health in the process.

The unique way these bills would be funded
What's unique about Sanders' proposals is how the free college education for undergraduates and improved community social programs would be funded.

As it's currently written, both bills "set a nominal tax of $0.50 on every $100 of stock trades on stocks sales, and lesser amounts on transactions involving bonds, derivatives, and other financial instruments." In other words, when you sold stock, you would owe $0.50 for every $100 of stock you sold. If you owned bonds or other investment vehicles, the amount you owe would be lower, because historically, the stock market offers the best long-term growth rate, and other investment vehicles have lower historical return percentages.

Think about this for a moment. For long-term investors who own stocks for years or decades at a time, the thought of paying a meager 0.5% tax on capital gains isn't all that bad. Long-term investors are already using time to their advantage and have likely compounded their gains with the use of dividend income. For this investor, a "Robin Hood Tax" will be of little consequence.


Source: Flickr user www.vpsi.com.

On the flip side, Wall Street high-frequency traders, day-traders, and even select short-term investors could get absolutely clobbered by such a tax. High-frequency trading, or HFT, works by trading large sums of money, sometimes in fractions of a second, and scalping pennies to net minimal but often repeatable gains. Sometimes gains of $100-$500 can be made hundreds of times per day thanks to computer software programs, and that profit certainly adds up over time.

However, introducing a 0.5% tax on stock sales could tip the balance away from HFTs, which can disrupt markets and increase volatility. The Robin Hood Tax also adds yet another reason for short-term traders to abandon the strategy of "timing the market" -- they already have to pay higher capital gains taxes than long-term investors.

One major factor to keep in mind
There's one big point everyone should keep in mind here. While Sanders' duo of bills might look great on paper for prospective and current college students, as well as lower-income individuals in need of assistance, the odds that either bill will pass in its current form is very low.

From a simple political aspect, Republicans are the majority party in Congress at the moment, and neither house of Congress is likely to approve a bill that would increase taxes on anyone, let alone Wall Street. Even if the Republican Party weren't in the majority, a substantial transformation of investment tax code and student loan debt regulations would prove a monumental struggle.

What Sanders' bill proposals really accomplish is to increase awareness and advocacy -- for more affordable access to education and for the social advancement of those living near or under the federal poverty line. Implementing that change will be difficult, regardless of which party is in office, but at least the discussion can begin.

The article "Robin Hood Tax" Aims for Free College Education at Wall Street's Expense originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.