FTT: This Time It’s Different. Or Is It?

As the field of 2020 Presidential candidates unfolds, it is becoming evident that a financial transaction tax (FTT) will be presented as a progressive means of raising funds for government programs. This will not be the first time our industry has faced this issue, and while details have yet to unfold, a proposed FTT will most likely espouse the perceived attributes of past versions. Mainly, that its low rate and broad based design raises reliable revenue while curbing behavior deemed threatening to our markets perpetuated primarilyby proprietary trading firms. In the end, an FTT is a tax on capital and the savings of individual investors that causes rippling effects detrimental to our nations GDP.

While the arguments for opposing FTTs still exist, the conditions and environment under which they will be presented this election cycle are different enough to cause concern.

Infrastructure Builds vs. Social Programs

In previous versions of FTTs, the expected revenues were to be used towards social programs. For many congressional members and voters, the idea of a new tax that would be used towards free college and healthcare were admirable but non-starters. As such, debate on the practicality of an FTT was limited.

This time however, an FTT will be discussed as Congress begins debate on President Trumps February 2019 infrastructure build report, Legislative Outline for Rebuilding Infrastructure in America. Infrastructure spending is an issue where both parties can find agreement. While the funding mechanism in Trump’s plan is a combination of federal, state and private funds, it begins with an incentive program of federal grants. How these federal grants are funded is not mentioned in the report.

It is also worth highlighting that infrastructure builds have clear winners. Beneficiaries of past FTTs were to be industries such as universities and healthcare providers who were already receiving income from the private sector for their services. These entities did not view the government getting in the middle as resulting in incremental revenues and thus did not support the tax. An infrastructure bill would result in incremental revenues to contracting and manufacturing firms that would view an FTT as a means to an end.

Usual Suspects

For congressional members with no new taxes platforms, justifying a new tax to their constituents is difficult. Unless, the entity or group being taxed is unpopular. FTTs have always been presented under the misguidance as a tax on Wall Street. Since its inception, Wall Street has gone through periods of unpopularity.

However, recently theres been a series of events that have contributed to our market structure being viewed as more unpopular than usual. Whether its a government official blaming today’s market structure for the extreme volatility we experienced at year end, or a whitepaper sponsored by the Department of Defense claiming investors receive inferior executions, our industry is going through a fresh assault.

Meaningful Figures & Behavior

A primary flaw inherent to an FTT is that its low rate will not result in a change of behavior by the entity being taxed and thus it should provide a consistent level of revenue. The rates proposed often appear benign until you start doing the math and realize they are anything but. The tax rates being discussed are real and estimated revenues are meaningful, real and meaningful enough to cause a change of behavior resulting in harm to our markets and the investors we serve.

A proposal by Presidential candidate Sen. Kirsten Gillibrand (D-NY), for example, has an FTT of .1 percent on the value of securities traded and a tax revenue estimate of $777 billion over a 10-year period. At first glance $0.10 per every $100 does not appear to be significant until you realize that an investor who purchases just 10 shares of Amazon, a roughly $16,000 transaction, would pay $160 in taxes. That is a meaningful figure.

Heres another way to look at Sen. Gillibrands $777 billion tax over 10 years, or $77.7 billion per year. According to the U.S. Energy Information Administration, the U.S. consumed 140 billion gallons of gasoline in 2015. It would take a $0.55 per gallon tax to generate $77 billion. Its safe to say a tax of that magnitude and transparency would result in a change of behavior.

A respected law firm recently cited that a characteristic of an FTT is that investors likely would not notice the small charge and it would be immaterial to their investment decisions. In effect, the tax would be collected in a manner that would be invisible to investors. There is truth in that statement, which again should cause concern for our industry because it increases the likelihood of an FTT being instituted.

So, yes while the arguments against an FTT remain the same, the backdrop or conditions they will be presented under are very different and as such, our industry should be concerned. Building and repairing our nations highways, bridges, power grids and infrastructure is important for our country and ensuring long-term projects are financed is key to their success. However, we also need to make sure that whatever that funding mechanism is, it does not do irreparable harm.