Democratic Presidential contenders seem to be falling all over themselves with plans to soak the rich. From higher income taxes to wealth taxes to financial transaction taxes, there’s nothing that is off limits for higher taxes. Bernie Sanders, one of the top candidates for the nomination, has publicized his plan to establish taxes on various financial transactions. But while the plan is intended to soak Wall Street traders, it will have a negative effect on Main Street investors as well.
Sanders’ plan is to institute a financial transaction tax of 0.5% on all stock trades, 0.1% on all bond trades, and 0.005% on all derivatives trades. His stated purpose is to raise enough money to pay for free college for all Americans. But it’s curious that the highest tax rate is on stock trades that ordinary Americans rely upon in their retirement accounts, while derivatives trades that are normally the realm of Wall Street investors are less highly taxed.
Once such transaction taxes are instituted, just like the income tax the rates will almost certainly be raised higher once the government feels the need for more money. And you can almost guarantee that the amount Sanders thinks he’s going to get won’t be enough to pay for his free college plan, as everyone and their mother would seek to take advantage of “free” college.
For ordinary investors who are trying to save money and invest their hard-earned savings into productive assets, these financial transaction taxes will make severe cuts to their earnings. The financial industry has taken great pains to minimize fees on investment accounts and retirement funds in order to maximize investor returns. An additional 0.5% per trade would eat significantly into investment gains.
With stock markets averaging only 4-5% annualized growth over the past 20 years, Sanders’ stock tax would be equivalent to about 10% of the average investor’s average annual return. Imagine having 10% of your potential stock gains taxed each year. And for those with mutual funds that invest in stocks, those fees would be passed on each year when it comes time for distributions. Do you really want to vote for someone who will take 10% of your stock market gains each year?