A top Republican is seeking additional answers on the potential impact of a financial transaction tax on the markets and U.S. economy.
In a letter obtained by FOX Business, Ranking Member of the House Financial Services Committee Patrick McHenry asked Treasury Secretary Steven Mnuchin to analyze the effects of a new levy on stock trades -- a policy favored by several Democratic presidential candidates, including Elizabeth Warren and Bernie Sanders.
“Proposals suggesting that taxes will be paid directly when an individual purchases or trades on an exchange, or when a company purchases derivatives such as futures contracts or options to hedge against price changes in an important commodity for their business, directly implicate the stability of the marketplace,” the North Carolina Republican wrote.
To fund part of her $20.5 trillion Medicare-for-all proposal, Warren, a frontrunner, has called for a tax of 0.1 percent on the sale of stocks, bonds and derivatives, which she said could raise $800 billion over a decade.
Sanders, meanwhile, unveiled an even more ambitious plan, calling for a 0.5 percent tax on stock trades, 0.1 percent on bonds and 0.005 percent on derivatives transactions. To offset the burden for individuals with an average income of less than $50,000, the Vermont senator said he would create an income tax credit. Over the course of 10 years, Sanders said the tax would raise a staggering $2.4 trillion, money that would be used to pay for free college.
Although the proposed taxes would likely hit all investors -- including those with 401(k)s and pensions -- it would affect wealthy Americans the most, because an estimated 84 percent of the total value of stocks is controlled by the wealthiest 10 percent of households, according to a paper published by the National Bureau of Economic Research.
But McHenry called for an analysis by the Office of Financial Research to determine how an FTT could affect Americans' retirement savings, as well as other possible losses in public and private endowments and pension plans. He also asked for an investigation into whether an FTT could drive investors to non-U.S. exchanges, including Chinese or Hong Kong exchanges.
“One disturbing study indicates that, with an FTT in place, a typical mutual fund investor would have to work an additional two and a half years to achieve the same retirement goal,” he wrote.
The study that McHenry appeared to be referencing is from the Securities Industry and Financial Markets Association (SIFMA), an industry trade group. In a July post, SIFMA CEO Kenneth Bentsen argued an FTT would cause a “cascade of taxation that will accumulate during the standard operations of a mutual fund portfolio, resulting in significant reductions in overall returns.”
The average mutual fund investor will have to save an additional $600 per year — a 12 percent increase in savings — or work an additional two years to achieve her retirement goals, he said. If the tax is more than 0.1 percent, that individual would have to save (or work) more. Investors in an active small-cap equity mutual fund would likely see returns shrink by an estimated 1.62 percent annually, according to SIFMA.
“Not only would such a tax negatively impact all investors, it would also negatively impact the world’s most liquid equity market, to the further detriment of all investors,” he said. “And, history has proven time and again, such a tax never raises anywhere close to the revenue promised, while wreaking havoc for investors and markets.”