I am actually not one to kick a man when he’s down, and frankly Bernie Sanders is definitely down right now, but I did want to close on at least one more review of his extensive plans he has been trying to sell to his supporters. Last time I dealt with his plans for expanding social security (which was a massive wealth redistribution scheme, and pretty obviously). This edition will deal with his plan to eliminate student loan debt and make colleges and universities free.
Again, Bernie makes it sound so simple, and he makes those with any money sound like the evil beings that we should all come to despise. The only problem with that rhetoric (well, there’s actually several problems, but let’s focus on one for now): Those people are actually the majority of Americans, and NOT the Wall Street “greedy financiers” he targets in his speeches. Keep in mind, at least 52% of households have some play in the markets today.
What are the details? Without going into taxation on certain basis points and other technical terms that muddy the waters, let’s keep it simple: Bernie wants to tax stock, bond, and derivative trades. All of them. He has stated that it will raise $2.4 trillion dollars. Again, on the surface, the numbers appear legit. But the surface never (never) tells the real story. The same is true in this case.
Bernie proposes taxing 0.5% tax on every $100 of stock trades, 0.1% tax on bond trades, and 0.005% tax on derivative trades. He says that will generate $220B per year in revenues. Putting it mildly, that’s just not the case.
For reference, the US trades roughly $1 trillion in stocks and bonds, per day. Even more (3x-4x more) in derivatives. But who are making those trades? Mostly these are investment houses, mutual fund managers, and professional stock brokerages that are doing this for every person in America with an IRA, 401K, or other investment vehicle. Plus, there are a slew of individual traders (armchair market watchers and at-home traders). But in all of those cases, the people paying those taxes are not the “big money” guys at the corner of Wall and Broad Streets, but instead they are us. You, me, and anyone who has stocks and bonds in any program. We hire those guys in those funds, brokerages, and banks to build and protect our portfolios. They don’t pay those taxes… we do.
So, let’s visit the behavior of a trader. What do they do? Optimally, they buy low and sell high. Sounds simple, right? It’s not – there are millions or data artifacts that must be sorted through each and every hour or every day (world events, press releases, product updates, investor guidance, competitive intel, monetary fluctuations, political turmoil, supply line viability, etc…) to make buy and sell decisions. Using tools like analytics, trend data, and even experience tapered with gut feel, these buy and sell decisions are made continuously throughout each trading day, and these days 24×7. Traders are the ultimate version of “Agile” in society. What happens if we add Bernie’s tax to their behavior?
Let’s first keep in mind that a stock may trade hands several times a day. But now we know that Bernie is going to put tax pressure on every trade – which may actually slow down the pace at which trades happen, to avoid a heavy tax burden on the portfolio (e.g., all of us that are invested in that portfolio). This slows down trading, and slows down his forecasted revenues. It also, and most importantly, impacts a fund’s ability to be as agile as possible to dump losers and buy winners, which costs us all money. Summary: Our portfolios make less money, and what money we do make is taxed, and not at 0.5%, but in multiples of that as stocks move in and out of funds frequently. A short example: If a fund trader moves $1000 worth of stocks in and out of his fund 6 times in a day via various trades, to maximize value, that $1000 is taxed not at $5, but at $30. That day. Even more, actually, if he gained value via those trades…or less if he dumped stocks and ran to safe havens in bonds (e.g., this last week of market panic bleeding).
But as always, don’t take my word for it – look at the Europeans. They tried this in the last few years in France. It did as was warned: Trades declined by an average of 10%, and revenue fell well-short of forecasts and expectations. On the bond side it’s potentially even worse: It increases the cost on the treasury to issue debt, increase market volatility, and actually reduces household wealth, ultimately lowering consumption.
Simple rule of economics in a market-driven environment: You have money, you spend money. That money buys goods. Money flows through a lifecycle that includes suppliers who pay wages, make profits, and drive market valuations…which goes to stock prices. Now reduce the available money, and follow that same path, but now you have less, and therefore spend less. Consumer confidence drops, profits drop, valuations drop, stock prices drop. WAY over-simplified… I know. But the relative linearity of the monetary lifecycle is actually quite predictable.
Net net: Bernie wants to tax Wall Street. Ultimately, he is again wanting to tax all of us with any involvement in the markets whatsoever, to redistribute wealth and along the way harm the markets… To make something appear free.
