Bernie Sanders’s Financial Transaction Tax Won’t Raise as Much Revenue as He Thinks

May 21, 2015

This week, Senator and Democratic Party presidential hopeful Bernie Sanders (I-VT) introduced a plan to provide zero-price public college education for all paid for by a financial transaction tax.

We have discussed many of the problems with a financial transaction tax in the past: it is a poor tax base that results in “pyramiding” by taxing the same economic activity multiple times. It also results in a less efficient capital market.

Another problem with the financial transaction tax is that it will not raise the amount of revenue Bernie Sanders believes. Since the financial transaction tax is a tax on trades, the number of taxable trades would decline. The smaller tax base would mean lower revenue from the financial transaction tax. In addition, the reduced trade volume would result in fewer people making money from the stock market and could push down capital gains tax revenue.

A study of the Swedish financial transaction tax in the 1980s showed that the negative impact financial transaction taxes had on the Swedish economy made it a poor revenue raiser.

In the 1980s, Sweden introduced a financial transactions tax. As expected, the tax reduced trade volume: “when the 2% tax was introduced in 1986, 60% of the trading volume of the 11 most actively traded Swedish share classes migrated to London to avoid taxes.”

Not only did this push down the amount of revenue the transaction tax itself raised, revenue from the capital gains tax also declined. As a result, overall tax revenue in Sweden declined. According to the same study: “the capital gains tax revenue fell so much in response to lower levels of trading that transaction tax revenues were entirely offset.”

A financial transaction tax would result in lower levels of trade volume in the United States and with the damage it would do, it would end up raising less overall revenue for the federal government than the Senator expects. In no way does a financial transaction tax represent good tax policy.

Bernie Sanders will likely score political points with his proposed financial transaction tax. But, if he wants to be serious about funding a new federal program (ignoring whether that new program is a good idea or not), he should be looking for a more reasonable and efficient source of revenue.

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