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Warning: How Industry Rigged the Data to Attack Financial Transaction Taxes

Introduction

In recent years, several proposals have been put forth to implement a tax of a fraction of a percentage point on the purchase of stocks, bonds and derivatives to fund public investments and to curtail the practice of high-frequency trading.[1]

Public Citizen recently issued a report concluding that a 0.1% financial transaction tax (FTT) would cost an average middle-income family about $13 a year if the family has a retirement account.[2] For the roughly 50% of families that lack retirement accounts, the cost would likely be zero. The report separately applied cost estimates on a 0.1% FTT issued by the Investment Company Institute (ICI), which represents mutual funds. Applying the industry group’s estimates yielded a conclusion that the average costs to middle-income families would be about $13 to $35 a year, depending on the family’s mix of investments.[3]

These are hardly alarming costs. But interests representing the financial industry have put forth a much different narrative.

Financial industry interests in September issued at least four papers claiming that proposed taxes on financial transactions would seriously harm ordinary Americans. These papers have portrayed proposed FTTs as an attack on “Main Street” and poison for Americans’ retirement accounts. Three of the four organizations issuing papers have lobbied against the FTT.[4] (Public Citizen has lobbied in favor of the proposal.[5])

Industry groups have only occasionally issued studies on the FTT in the past. The spate of industry papers arriving at similar findings and employing similar rhetoric, along with overlaps in the membership and principals associated with the various groups, suggests that these papers were part of an orchestrated industry campaign.

The conclusions put forth in these industry papers are not credible. A close look shows that each relied on assumptions that conflict with real world data or omitted key details of its methodology, altogether. To the extent that these papers include descriptions of their methodologies, each suffers from two chief flaws:

  • First, the papers use models that assume that the average churn, or turnover, of mutual fund holdings is much greater than it currently is. This is important because much of the cost to investors from an FTT would result from mutual funds’ turnover of their portfolios. Choosing an unrealistically high turnover rate to forecast FTT costs would be like assuming that everybody drives a gas guzzling SUV when predicting an average person’s fuel costs.
  • Second, these papers ignore the likelihood that incentives from an FTT would reduce trading and, therefore, result in lower FTT costs down the road than recent turnover data suggest. Interestingly, two of the industry papers do say that an FTT would reduce trading volume. But they only discuss reduced trading in the context of their claims that the tax would not generate the anticipated levels of revenue. These papers’ forecasts on costs to consumers are based on assumptions that trading will continue at the current pace. This is a clear inconsistency that almost certainly reflects motivations by the reports’ authors to cast the FTT in an unfavorable light, rather than to educate the public.
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