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401(k)s Could Get Clipped by Another Financial Transaction Tax

Practice Management

For those who thought the notion of a financial transaction tax might be a passing fad, guess again.

Presidential aspirant Sen. Bernie Sanders (I-VT) and Rep. Barbara Lee (D-CA) have just introduced the Inclusive Prosperity Act of 2019, along with Sen. Kirsten Gillibrand (D-NY) (also a presidential aspirant) and more than a dozen House Democrats (see below).

The legislation imposes a tax of “a fraction of a percent” on the trades of stocks, bonds, and derivatives, and is estimated to generate up to $2.4 trillion in “public revenue from wealthy investors” over 10 years ($220 billion in the first year), while it is also touted as “deterring the high-frequency trading that increases the instability of the financial sector and produces no economic value.” 

While similar in stated purpose to the Wall Street Tax Act introduced earlier this year, this legislation sets different rates on stocks, bonds, and derivatives based on the existing transaction costs in each market – 0.5% for stocks, 0.1% for bonds, and 0.005 for derivatives. The bill’s sponsors claim that this “more targeted approach roughly equalizes the increase in transaction costs across securities due to the tax and thus reduces the economic distortions and tax avoidance possibilities created by it.” 

The Wall Street Tax Act, also backed by Sanders and Gillibrand (among others) would impose a financial transactions tax (FTT) on the sale of stocks, bonds and derivatives at 0.1 percent (10 basis points), and would raise an estimated $777 billion over a decade, according to the sponsors of the legislation, Sens. Chris Van Hollen (D-MD) and Brian Schatz (D-HI) and Rep. Peter DeFazio (D-OR).

Another potential difference: While the Wall Street Tax Act made no acknowledgement of the impact on retirement plan savers (or their savings), and some staffers of those bills’ sponsors were subsequently dismissive of the impact, a summary of the Prosperity Act notes: “Because the increased trading on Wall Street over the past several decades has not benefited working Americans, the reduced trading that results from a financial transaction tax would not harm the savings of the middle-class who invest through pensions or mutual funds. In fact, these people would likely save money because they would be charged fewer fees for trades.”

So, apparently there would be less trading in retirement accounts as a result, and that’s supposed to save retirement savers money. How those regular payroll deductions – and retirement savings – are going to get invested without being harmed by this trading tax remains a mystery.

While it offers no offset for trading within retirement accounts, the bill’s summary also states that, “In the case of individuals of modest means who actually trade directly or through brokers, the legislation would provide an income tax credit to offset the entire financial transaction tax for individuals with incomes less than $50,000 and married couples with incomes less than $75,000.”

Lee’s House companion was introduced with cosponsors Reps. Holmes Norton (D-DC), Takano (D-CA), Khanna (D-CA), Cohen (D-TN), Jayapal (D-CA), DeLauro (D-CT), Omar (D-MN), McGovern (D-MA), Huffman (D-CA), Pocan (D-WI), Schakowsky (D-IL), Grijalva (D-AZ), Pingree (D-ME), Lowenthal (D-CA), Gabbard (D-HI), Espaillat (D-NY), Tlaib (D-MI), Garamendi (D-CA) and Hastings (D-MS).