In reality, this little quarter-percent tax would devastate America’s financial markets and the broader economy. First of all, the “in and out” cost of a transaction is not a quarter-percent: it is a half-percent. Again, this might not seem like much, but consider how difficult is to make even 4% on a safe investment. When one factors in an average inflation rate of 3%, the resulting profit is only 1%, and this is before the effect of state and local taxes.
The sponsors of HR4191 are either so naïve as to have no conception of the operations of modern-day financial markets — and of the competitiveness which makes a single basis point a crucial cost advantage — or, more likely, so callous as not to care. They see an opportunity to curry favor with a poorly informed electorate by trashing Wall Street while at the same time placing within their grasp trillions of dollars of future tax revenues to secure future political advantage.
Unfortunately, those that might be harmed include the patient, long-term investors who invest their funds in IRAs, 401Ks, and other retail investments. These investments are generally low-yielding mutual funds for which trading costs make a crucial difference in long-term return. Barron’s has calculated that the annual cost of a total market index, now 0.07%, would rise to 0.15% under the proposed tax. The loss of 0.08% per year, or a compounded 0.116% per decade, might not seem like much, but when it is imposed every year and compounded over the fifty-year investing lifetime of an average investor, it amounts to a great deal.
And this is the effect even in the case of the lowest-cost index funds.