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Gillibrand's claim on transaction taxes not whole story
Sen. Kirsten Gillibrand supports taxing certain securities trades to pay for some of her proposed initiatives, such as job training programs. The Democratic senator from New York is a co-sponsor of one bill that calls for a tax of .1 percent and another one with varying rates of up to .5 percent.
"I believe that we can easily put in place a transaction tax," Gillibrand, a former securities lawyer and presidential candidate, told a group gathered at the New Hampshire Institute of Politics. "And so, I believe a transaction tax, pennies on the hundred dollars, it’s such a small amount of money. The only industry it will harm or disrupt is the flash trading industry, which I don’t believe actually creates value. But, it also creates enormous amounts of revenue. And other countries like the UK have already done it, and it didn’t affect their financial markets at all."
Gillibrand said the tax would generate about $77 billion a year. The Congressional Budget Office found that over 10 years, a transaction tax of .1 percent would generate $777 billion, though other researchers have come up with different revenue estimates.
Transaction taxes have been used in other countries, and the United States had a transaction tax on the issuance and transfer of stocks from 1914 to 1966. There have been some calls in Congress and elsewhere in recent years to bring them back, and Gillibrand is not the only presidential candidate to favor them.
The United Kingdom has had a "stamp duty" since 1694, and it’s currently a .5 percent tax on securities issued by companies registered in the UK, though the original issuance is exempt. There are several other exemptions.
Many countries have enacted some kind of financial transaction tax, and some have abandoned them. A highly cited paper on transaction taxes in different countries, published in 1994 and written by Harvard economists John Y. Campbell and Kenneth A. Froot, notes that experiences with these kinds of taxes are "quite varied."
Since Gillibrand mentioned the United Kingdom, we focused our research there.
We approached Gillibrand’s campaign for more information about her claim, and her spokeswoman, Meredith Kelly, said the United Kingdom’s "economy and stock exchange are thriving." Kelly sent us two pieces of evidence to support the senator’s statement, including a paper in the National Tax Journal stating that "many world financial centers," including the United Kingdom, "thrive despite the presence of" financial transaction taxes.
One of the authors of that paper, Leonard Burman, a professor at Syracuse University and co-founder of the Tax Policy Center, wrote in an email that Gillibrand’s claim "sounds like an overstatement." Financial transaction taxes "surely reduced trading volume," he wrote, adding that the reduction in trading volume is something supporters like about the tax.
The other piece of evidence Kelly sent was an opinion column written in 2015 by Jared Bernstein, who was an economic advisor to former Vice President Joe Biden. Bernstein wrote that he favored enacting a transaction tax in the United States as a way to raise revenues while reducing trading that makes markets volatile. He wrote, however, that the "historical evidence" on whether transaction taxes raises or lowers market volatility is "inconclusive."
Several studies of the effects of the transaction tax in the United Kingdom have highlighted market volatility, share price and investor behavior. While some market impacts have been found, supporters of the tax note that the London market remains robust.
When transaction taxes are imposed, some countries see trading activity move to other, untaxed markets. Campbell and Froot wrote that in the United Kingdom, the tax "cannot be avoided by trading abroad but it does stimulate trading" in other untaxed financial instruments and "also seems to reduce total trading volume to some degree."
Another paper, published in 2011 by the International Monetary Fund, found the market for a kind of derivative instrument, known in the UK as "contracts for difference," had "grown rapidly since its inception in the early 1990s, in part due to its exemption from stamp duty."
The author, economist Thornton Matheson, wrote that the transaction tax in the UK is "frequently regarded as successful" because of how much revenue it raises.
A 2004 paper from a British think tank, the Institute for Fiscal Studies, found that the stamp duty depresses share prices, which may increase the cost of capital for firms, and also distorted how investors interpret share price as an indicator as to a firm’s profitability.
A 2007 paper by UK economic consultant Oxera argued in favor of abolishing the tax, claiming that stamp duty made capital more expensive, by up to 12 percent in some sectors. Like other studies, the authors found that investors chose non-taxed financial instruments to avoid the stamp duty.
A 1997 study for the Bank of England found that the stamp duty had no effect on volatility in the UK.
Those in favor of implementing a transaction tax in the United States note the London Stock Exchange is robust and the tax generates significant revenue. Sarah Anderson, global economy project director at the progressive Institute for Policy Studies, said the London Stock Exchange manages to thrive even in the face of Brexit uncertainty.
Another supporter of implementing a transaction tax in the United States, economist Robert Pollin, said the tax has "not prevented the City of London market from operating on a gigantic scale."
"It is true that the extent of day-to-day trading in the UK market is somewhat less than on Wall Street," said Pollin, co-director of the Political Economy Research Institute at the University of Massachusetts Amherst. "That may be due to the financial transaction tax. But it is really hard to pin that down one way or another."
Gillibrand said that a transaction tax didn’t affect financial markets in the United Kingdom "at all."
The tax has been in effect for centuries and the London Stock Exchange remains a robust financial hub. But enacting a tax likely has some effect, and studies have found that share price and trading volume are affected by the tax.
We rate her claim Mostly False.
Video, Sen. Kirsten Gillibrand speech, New Hampshire Institute of Politics, Manchester, N.H., July 9, 2019, via NECN. Accessed July 10, 2019.
"Impose a Tax on Financial Transactions," Congressional Budget Office, Dec. 13, 2018. Accessed July 10, 2019.
"Financial Transactions Taxes: In Brief," Congressional Research Service, March 27, 2019. Accessed July 10, 2019.
Bill S. 1587, Inclusive Prosperity Act of 2019, 116th Congress, Congress.gov. Accessed July 18, 2019.
Bill S. 647, Wall Street Tax Act of 2019, 116th Congress, Congress.gov. Accessed July 18, 2019.
"2020 Election: Tax Plans for All 24 Democratic Candidates," Kiplinger, June 25, 2019. Accessed July 17, 2019.
"Bernie Sanders Revives Plan to Tax Stock, Bond and Derivatives Trades," Bloomberg, May 22, 2019. Accessed July 17, 2019.
"Mayor Pete’s 49.9999% Tax Bracket," New York Times, May 23, 2019. Accessed July 17, 2019.
Financial transaction tax, Andrew Yang campaign website. Accessed July 17, 2019.
"Gillibrand’s Financial Transactions Tax: A Retread of Bad Ideas," Tax Foundation, June 20, 2018. Accessed July 11, 2019.
Financial Transaction Taxes (FTT): A Global Perspective, BNY Mellon, 2018. Accessed July 12, 2019.
Email interview, Nicole Kaeding, vice president of federal and special projects, Tax Foundation, July 16, 2019.
Email interview, Sarah Anderson, Global Economy Project Director and Inequality.org co-editor,
Institute for Policy Studies, July 16, 2019.
Email interview, Leonard Burman, professor, Syracuse University, co-founder, Tax Policy Center, July 18, 2019.
"Financial Transaction Taxes in Theory and Practice," Leonard Burman, William Gale, et. al., National Tax Journal, March 2016. Accessed July 18, 2019.
Email interview, Meredith Kelly, spokeswoman, Gillibrand 2020, July 11, July 18, 2019.
"International Experiences with Securities Transactions Taxes," John Y. Campbell, Kenneth A. Froot, National Bureau of Economic Research, January 1994. Accessed July 18, 2019.
"The Case for a Tax on Financial Transactions," Jared Bernstein, The New York Times, July 22, 2015. Accessed July 18, 2019.
"International Monetary Fund Working Paper: Taxing Financial Transactions: Issues and Evidence," Thornton Matheson, March 2011. Accessed July 10, 2019.
"Tax when you buy shares," Gov.UK. Accessed July 18, 2019.
"The effects of stamp duty on the level and volatility of UK equity prices," Victoria Saporta, Kamhon Kan, Bank of England, 1997. Accessed July 18, 2019.
"Stamp Duty on Shares and Its Effect on Share Prices," Steve Bond, et. al., Institute for Fiscal Studies, 2004. Accessed July 18, 2019.
"Stamp duty: its impact and the benefits of its abolition," Oxera, 2007. Accessed July 15, 2019.
"The London stock exchange is thriving despite Brexit," The Economist, March 9, 2019. Accessed July 19, 2019.
HM Revenue and Customs, Annual Stamp Tax Statistics, 2017-2018 Commentary, Sept. 28, 2018. Accessed July 19, 2019.
Email interview, Robert Pollin, professor, University of Massachusetts Amherst, co-director, Political Economy Research Institute, July 19, 2019.
The Revenue Potential of a Financial Transaction Tax for U.S. Financial Markets, Robert Pollin, James Heintz, Thomas Herndon, International Review of Applied Economics, 2018. Accessed July 19, 2019.
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