Proposed Tax Could Hurt Retirement and College Savers

Even outside of saving for retirement or a college education, an investor’s ability to save for any future goal is drastically diminished by the proposed financial transaction tax in Senate bill S. 1587, Vanguard says. 

Modern Markets Initiative (MMI), an education advocacy organization devoted to the role of technological innovation in creating the world’s best markets, released a report about the economic impact of Senate bill S. 1587, the Inclusive Prosperity Act of 2019’s proposed financial transaction tax (FTT).

While politicians are looking at this as mainly a tax on big Wall Street Investors, MMI CEO Kirsten Wegner says it “is in reality, a severe retirement tax on American savers from all income levels.”

MMI’s analysis shows any transaction tax would drastically harm institutions trading large volumes of securities such as pension funds, mutual funds and other institutional investors that directly represent the financial interests of American workers, as well as average Main Street investors with defined contribution (DC) retirement or 529 College Savings accounts.

MMI found the financial implications for average American savers include:

  • $19 million in annual FTT on 529 College Savings plans, or the equivalent of a year of full in-state tuition for 1,900 students at a public university;
  • $24 million in annual FTT for a single public university endowment with $20 billion AUM, or the equivalent of 3,227 college scholarship in a given year;
  • $64,232 in annual FTT over the lifetime of a 401(k) account, or the equivalent of delaying the average individual’s retirement by two years; and,
  • $132 million in annual FTT for the typical state public pension plan with more than $68 billion in assets under management.

Similarly, Vanguard found the proposed tax would require the everyday investor to work roughly two-and-a-half years longer before retiring in order to reach the same retirement savings goals achievable without the tax. The tax would make saving for college more difficult as well. Families could take on debt to make up the difference, with a $7,800 student loan. Or, parents would need to save roughly an additional $250 per year, per child, to achieve the same balance in a college savings account.

“Even outside of saving for retirement or a college education, an investor’s ability to save for any future goal is drastically diminished by the proposed tax,” Vanguard says. It shows that the ending value of an investment of $10,000 in a small-capitalization active equity fund would be reduced by roughly 19% with the proposed tax, after 20 years.

According to Vanguard, the experience of other countries—particularly in Europe—have shown that FTTs distort capital markets. FTTs generally increase risk in the financial system by hurting market liquidity, producing volatility, increasing bid-ask spreads, encouraging financial engineering, and raising costs of capital.

At the same time, FTTs have consistently failed to deliver the promised tax revenues because FTTs shift financial activity to less-regulated markets. For example, Vanguard says, France and Italy did not raise even half the first-year revenue they had projected from the FTTs they enacted in 2012 and 2013, respectively.