Tax Bill Targets Wall Street Trading

Financial Institutions Law Alert

On March 5, 2019, House Democrats, led by Rep. Peter DeFazio (D-OR), reintroduced their proposal to tax securities transactions. The House bill, titled the “Wall Street Tax Act of 2019,” would impose a 0.1% tax on all transactions in stocks, bonds and derivatives in the U.S. or involving U.S. firms or citizens, even if transacting in foreign markets. That is the equivalent of a $1.00 tax on a $1,000 transaction. Initial public offerings and short-term debt with maturities of 100 days or less would be exempt.

The purpose of the bill, in addition to raising revenue, is to discourage high-frequency and speculative trading and to decrease overall market risk and volatility. High-frequency trading, a type of algorithmic trading involving the purchase and sale in milliseconds, takes advantage of minute differences in prices that regular investors cannot access.

The Joint Committee on Taxation estimates this financial transaction tax could help reduce the budget by adding $777 billion in revenue over the next 10 years. According to the Congressional Budget Office, “[t]he tax on financial transactions would reduce taxable business and individual income."

Proponents of the bill assert that this progressive tax would increase revenue, which is appealing to many Democrats in the wake of the 2017 Republican tax bill, which reduced taxes for most Americans, but disproportionally benefited corporations and wealthy individuals. This proposed tax would affect wealthy Americans the most. According to the National Bureau of Economic Research, an estimated 84% of the value of stocks is owned by the wealthiest 10% of households. Some experts claim the tax would not be detrimental to trading or price signals.

Opponents say the projected tax revenue is overinflated and could be significantly less. They claim that the transaction tax would discourage trading and investing, thus lowering trading volume and accompanying tax revenue. Additionally, while the proposed tax would disproportionately impact wealthy investors, it would increase the cost of investing for all investors, including ordinary Americans holding pensions and 401(k)s. Moreover, opponents warn that the tax could affect market behaviors and significantly reduce liquidity. According to a 2016 Tax Policy Center report, a financial transaction tax could reduce volatility but it could also increase it. While a financial transaction tax might decrease some undesirable trading activity, it could also reduce beneficial trading activity, such as reducing spreads and increasing liquidity. Lastly, opponents note that such a tax would lower the value of financial assets.

The bill is similar to one introduced by Democrats in July 2016 titled “Putting Main Street FIRST: Finishing Irresponsible Reckless Speculative Trading Act,” which proposed a 0.03% financial transaction tax. That bill never made it out of the House Ways and Means Committee. However, at that time, the Democrats did not hold a House majority and the country had not yet experienced a progressive wave reflected in the 2018 midterm elections, which has resulted in increased criticism of financial markets and calls for increasing taxes on the wealthy.

The United States already assesses small fees on securities transactions to help fund the Securities and Exchange Commission. Other countries, such as Australia, Belgium, France, Italy, South Korea, Switzerland and the United Kingdom, have implemented financial transaction taxes similar to those being proposed by the House and Senate bills, with mixed results.

The House bill was introduced along with its companion legislation in the Senate last week by Sen. Brian Schatz, (D-HI). It would apply to transactions after December 31, 2019.

Bressler will closely monitor the bill’s status, but it is not expected to gain widespread support in Congress. Accordingly, while it is unlikely that any bill proposing a financial transaction tax will be passed during the Trump administration, it is likely to be an issue during the 2020 election.