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Cost of a Financial Transaction Tax to Average Investor Would Be Microscopic Compared to Existing Fees, Public Citizen Report Shows

March 12, 2014

Cost of a Financial Transaction Tax to Average Investor Would Be Microscopic Compared to Existing Fees, Public Citizen Report Shows

Tax Would Improve Nation’s Balance Sheet and Discourage Rapid-Fire, Automated Trading

WASHINGTON, D.C. – A financial transaction tax (FTT) would cost ordinary investors just a minuscule amount compared to expenses they already bear, while bringing in revenue and discouraging risky trading practices, a new Public Citizen report shows.

The report, “A Matter of Perspective,” analyzes a hypothetical investor who invests his or her money either in a mutual fund or a self-directed portfolio of individual stocks.

An FTT is a minuscule levy on transactions involving stocks and other financial products. A proposal to implement one is pending before Congress.

If a person invested $85,000 (representing roughly the average 401(k) account) in a mutual fund with average fees and asset turnover rates, that investor would now spend $1,144 a year on hidden and disclosed costs, the report concludes. If one counts the 1 percent front-end sales fees that the average mutual fund charges, that investor’s first-year costs would jump to $1,994.

In comparison, the costs resulting from an FTT of 0.01 or 0.03 percent would be microscopic. With a 0.03 percent FTT, an investor with $85,000 placed in an average mutual fund would pay only $24.48 in recurring FTT costs. If one includes an FTT purchase tax on an $85,000 investment, the investor’s total, first-year FTT-related costs would be just $49.48.

These figures illustrate that the investing fees paid by mutual fund investors would increase less than 3 percent if a 0.03 percent FTT were in place. A hypothetical scenario in the report calculating costs for a hypothetical individual stock investor found that the investor’s annual investing costs would rise by just 7.5 percent under a 0.03 percent FTT.

“The costs to ordinary investors of a small FTT would barely amount to a rounding error, while existing fees are an albatross holding back existing returns,” said Taylor Lincoln, research director for Public Citizen’s Congress Watch division and author of the report. “Those purporting to look out for ordinary investors could demonstrate their sincerity by steering people away from funds with outrageous fees instead of fighting an FTT.”

A 0.03 percent financial transaction tax would raise $352 billion over nine years while making the market less risky by dampening high-frequency trading, a strategy in which computers buy and sell massive volumes of stocks and other financial instruments in millisecond intervals. Experts have blamed high-frequency trading for dramatic, irrational swings in the stock market.

The idea of leving an FTT has a broad base of support including Nobel Prize-winning economists like Joseph Stiglitz and Paul Krugman, and billionaires Warren Buffet and Bill Gates. U.S. Sen. Tom Harkin (D-Iowa) and U.S. Rep. Peter DeFazio (D-Ore.) in 2013 introduced The Wall Street Trading and Speculators Tax Act, which would create a 0.03 percent FTT and provide offsetting credits for investors in tax-advantaged accounts, such as 401(k)s.

“High-volume, computerized trading poses an unreasonable danger to our economy. A tiny tax on financial transactions would help limit this volatile practice while raising needed revenue,” said Susan Harley, deputy director of Public Citizen’s Congress Watch division. “It’s far past time for Wall Street to pay its fair share. Taxing financial transactions is commonsense reform and we urge Congress to take swift action to implement such a tax.”

Read the report.