Increased transaction costs would not be limited to individual stock transactions, but would flow through to mutual funds and ETFs and any other financial product to which the FTT applies. As a result, FTTs would also have a significant impact on passive investments like index-based products, which have higher turnovers given redemptions and portfolio rebalances, the study found. Of course, the biggest victims of the FTT would be high-frequency traders.
Since retirement accounts including the Federal Thrift Savings Plan are invested in target date funds, “every time the fund manager rebalances or shifts the asset mix, the tax would be imposed….These costs will be heavily born by pension, asset and fund managers managing individual investor money, i.e. passed on to the individual investor. This is a tax on all investors, not just the wealthy,” SIFMA said.
“Given the increased trade costs, FTTs decrease returns on investment portfolios and retirement accounts,” the study reported. An International Monetary Fund (IMF) study FTTs caused negative impacts on returns, including:
- On average, across 14 separate transaction tax changes in AsiaPac markets, a 23% rise in transaction costs caused an immediate 1% decline in daily market returns;
- A 1% tax on equity trades in Sweden resulted in a market decline of 5.3% in the 30 days leading up to the introduction of the tax.
“As shown in this report, FTTs fail to reach objectives on the following accounts: (a) they increase costs and lower returns for individual investors; (b) they typically, and often significantly, miss revenue generation projections, as the taxable base declines with volumes; (c) not only do they not curb volatility but instead increase it as trading volumes decline, harming capital markets; (d) they increase financing costs for municipalities, the federal government and corporations; (e) they increase prices for consumer goods; and (f) they generally damage economic growth by decreasing revenues and jobs in the U.S. as volumes migrate,” SIFMA asserted.