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Keep an Eye on Proposed Financial Transaction Tax

A financial transaction tax would impact investors in a couple of ways as the market reacts to the tax.

Benjamin Franklin once wrote, “In this world nothing can be said to be certain, except death and taxes.” True enough, but he missed that the magnitude of the latter is anything but certain. Savvy investors already try to reduce their taxes by investing in tax-favored accounts such as 529s, IRAs, or 401(k)s and avoiding investments, such as active mutual funds, that pay out distributions in a taxable brokerage. A number of new proposals for a blanket financial transaction tax would completely scramble this math by taxing all financial transactions.

The What and Why of a Financial Transaction Tax
A financial transaction tax is not a novel idea. Financial transaction taxes have been proposed in the United States going back decades and exist in many other markets including the United Kingdom and France. In fact, the U.S. already has a very small version of a financial transaction tax. A so-called “Section 31” fee is assessed on securities sold on all national exchanges and is used to fund the SEC’s operations. This fee is an extremely low rate of 0.00207%, whereas financial transaction tax proposals would increase rates nearly 50- to more than 240-fold, all the way up to 0.1% to 0.5% per transaction.