Bernie Sanders wants Wall Street to pay off America’s student debt. Wall Street, predictably, says that’s a bad idea.
Patent self interest aside, Wall Street has a point, economists say. Even before Sanders formally made his proposal to cancel $1.6 trillion in student debt and make public colleges free by levying a tax on trading, analysts have warned that it could make markets more volatile and that the costs -- much like President Donald Trump’s tariffs -- would ultimately be borne by American households.
For politicians looking to burnish their everyman credentials, Wall Street and its billions in profit can be a tempting target. Plans for a financial-transactions tax have been debated by the European Commission for almost a decade, and U.S. lawmakers have revived it in recent months. While Sanders trails in polls of Democratic presidential hopefuls heading into this week’s debates, he’s fueling an idea that would threaten to disrupt how everyone from high-frequency traders to pension managers operate.
"In 2008, the American people bailed out Wall Street. Now, it is Wall Street’s turn to help the middle class and working class of this country," Sanders said in his statement.
Industry groups and experts say the cost of the levy would be shouldered by Main Street investors: either directly as trading houses pass along the expense in higher fees and wider spreads, or indirectly through lower returns in mutual fund and pension accounts.
It’s an argument the industry has made before when facing proposals that could crimp revenue, but outside experts have found it has some merit. An International Monetary Fund study in 2011 suggested that transaction taxes initially target the finance industry, but eventually firms pass on higher costs to customers.
Since about 52% of U.S. households have a retirement account, according to the Federal Reserve, more than double the 22% of households with student debt, Sanders’s plan could end up taxing half the country to forgive debt held by less than a quarter of Americans.
"Can someone tell this guy @BernieSanders that these taxes are paid by mom and pop investors, mutual fund investors, folks with pensions and 401Ks," tweeted Larry Tabb, founder of research firm Tabb Group LLC.
The potential for higher costs and lower volumes has the financial industry spooked. Lobbying groups for the big banks, HFT firms and asset managers have spent years detailing the downsides of the proposal. Trading firm Virtu Financial Inc. listed a potential financial-transactions tax in between lawsuits and technological changes in the list of risk factors atop its latest annual report.
More than $1 trillion in stocks and bonds trade on a typical business day in the U.S., the Congressional Budget Office says, with trillions more in derivatives changing hands daily. Sales and trading operations and market infrastructure services produced almost $300 billion in revenue in 2017, according to McKinsey & Co.