If Senator Bernie Sanders (I-Vermont) successfully passes his proposed cancellation of student debt, investors say it could lead to them seeing slightly lower returns.
As Grit Post reported Monday, the proposed debt cancellation plan would be funded by a small financial transactions tax (FTT) on stocks, bonds, and derivatives, which Sanders said would raise $2.4 trillion over a decade. The legislation — which Sanders introduced with Reps. Pramila Jayapal (D-Washington) and Ilhan Omar (D-Minnesota) — would be paired with tuition-free public college, effectively making public higher education free for all.
However, the funding mechanism for Sanders’ plan is being met with skepticism by investors. Bloomberg reported that investors are already complaining about the possibility of having to pay higher fees for trading, and getting lower returns on their investments as a result. Additionally, traders say the costs of an FTT could ultimately be passed on to “mom and pop investors,” like those with pensions and 401(k) plans, and end up changing investor behavior.
“Fifty basis points on stock trades would severely crimp liquidity!” Interactive Brokers chief strategist Steve Sosnick said. “Market participants might move to options for the lower tax rate, making them more liquid than the underlying stock.”
“A tail that wagged the dog that much would become very unstable,” he added.
But according to more than 1,000 economists who signed onto a letter calling for an FTT (also known as a Robin Hood Tax) at the G20 summit in 2011, such a change in investor behavior is sorely needed. Signatories — which include Jeffrey Sachs, an advisor to former UN Secretary General Ban Ki-Moon; Harvard University economist Dani Rodrik, and Cambridge University economist Ha-Joon Chang — added that the United Kingdom already has such a tax and the economy was not harshly affected.
“The financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken. It is time to fix this link and for the financial sector to give something back to society,” the letter read. “Even at very low rates of 0.05% or less, this tax could raise hundreds of billions of dollars annually and calm excessive speculation. The UK already levies a tax on share transactions of 0.5%, or ten times this rate, without unduly impacting on the competitiveness of the City of London.”
Trading of derivatives — the high-risk investments that Sanders would tax at 0.005% to fund debt cancellation — has particularly exploded over the years. In 2018, Investopedia estimated that the derivatives market could be worth up to $1.2 quadrillion ($1,200,000,000,000,000). To put that figure in perspective, global GDP in 2018 was just $80 trillion, meaning the derivatives market is more than ten times the size of the global economy. In 2014, the four biggest American banks (JPMorgan Chase, Citigroup, Bank of America, and Goldman Sachs) held nearly $220 trillion in derivatives, which also outpaces the global economy.
In short, if the derivatives market collapses, so does the global economy.
This could be why the Economic Policy Institute (EPI) lauded FTT proposals in a 2016 study. Researchers wrote that even if the revenue raised from such a tax is negligible, financially incentivizing investors to not engage in high-frequency, high-risk trading on financial instruments like derivatives would be a net positive for the economy.
“Much evidence strongly suggests that the marginal value of financial transactions in the U.S. economy are near-zero, or even negative. If this is true, then U.S. households would strongly benefit from an FTT even if it raised very little revenue,” the EPI wrote. “In fact, in the case of zero marginal value of financial transactions, every dollar ‘crowded out’ from financial transactions by an FTT would boost American households’ incomes one-for-one.”
Sanders will likely be asked to lay out his debt cancellation plan in greater detail at the first Democratic presidential debate later this week, in which the Vermont senator will share the stage with former Vice President Joe Biden and eight other candidates.
Carl Gibson is a politics contributor for Grit Post. His work has previously been published in The Guardian, The Washington Post, The Houston Chronicle, Al-Jazeera America, and NPR, among others. Follow him on Twitter @crgibs or send him an email at carl at gritpost dot com.