closeup of national capitol building 'If targeting high-volume traders is the goal of thelegislation, then you have to ask whether or not the legislationmatches the goal,' said Jack Towarnicky of the Plan Sponsor Councilof America. (Photo: Shutterstock)

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Bicameral legislation introduced Tuesday by CongressionalDemocrats would slap a new transaction tax on most securitiessales.

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The Wall Street Act of 2019, the latest iteration of Democraticlawmakers' attempt to tax stock market trading, would levy a 10basis-point charge on the sales of stocks, bonds, andderivatives.

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That would create more stable equity markets by discouraginghigh frequency trading of the kind that spurred the “flash crash”in May of 2010, according to the bill's sponsors. And it wouldraise a bundle of cash for federal coffers.

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“High-frequency traders front-run the market and drive up pricesfor individuals, pension funds and other value investors,” saidRep. Peter DeFazio, D-OR, lead sponsor of the bill in the House ofRepresentatives, in a press release.

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“Some days high-frequency traders trade billions of shares thatthey sometimes hold for only seconds or less. They reap enormousfinancial benefits for themselves and their privileged eliteinvestors but add no value to our economy. This legislation willcurb unnecessary speculation and generate much-needed revenue tohelp the federal government fund national priorities and invest inthe real economy to benefit all Americans,” added DeFazio.

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A Senate version of the bill is sponsored by Sen. Brian Schatz,D-HI, and Sen. Chris Van Hollen, D-MD. Sen. Kirsten Gillibrand,D-NY, who has announced an exploratory committee for a presidentialrun, is a co-sponsor in the Senate.

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'High-roller' fee

About $300 billion in stocks and $800 billion in bonds—mostlyU.S. Treasury Securities–is traded on a typical business day,according to the Congressional Budget Office. Under current law,the transactions do not incur a per-transaction tax. The Securitiesand Exchange Commission does charge a small fraction of a basispoint to cover regulatory costs.

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The Wall Street Act would apply the 10 basis-point tax to thefair market value of equities and bonds, and payment flows underderivative contracts. Initial public offerings and short-term debtwith maturity of less than 100 days would be exempted.

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Democrats are billing the tax as a way to redirect Wall Streetprofits to common Americans.

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“Wall Street has made an art of high-speed trading and rankspeculation that has fattened the wallets of a few while puttingeveryday Americans at risk,” said Sen. Van Hollen. “This tinyhigh-roller fee will help curb this risky behavior while generatingrevenue that we can invest in growing our real economy and helpinghard-working families.”

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The CBO estimates the tax would raise $777 billion over the10-year budget window.

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A tax on Wall Street or a tax on Main Street?

But advocates for retirement savers say the Wall Street Act willhave unintended consequences for middle-class Americans, as itwould include new taxes on securities held in mutual funds bypensions, 401(k) plans, and collective investment trusts.

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Analysis from the CBO suggests a transaction tax could makeasset prices less stable, and potentially introduce more stockmarket volatility.

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“In our view, it amounts to an effective investment managementfee that is not insignificant over time,” said Brian Graff, CEO ofthe American Retirement Association, in an interview.

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“The fixation is on going after Wall Street 'high rollers,' butthey are not getting that a lot of working Americans are saving inthe market too,” added Graff.

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Sponsors of the legislation maintain the tax is small. Butanalysis by the Investment Company Institute shows a 10 basis-pointtax would have reduced the return on long-term mutual funds by $23billion in 2018.

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“A financial transaction tax would ultimately harm individualinvestors who are saving for retirement, education, and otherfinancial goals,” said Shelly Antoniewicz, senior director ofindustry and financial analysis at ICI.

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As the proposed law is written, bi-monthly deferrals to 401(k)plans would not be subject to the tax. But participants would betaxed when selling shares of mutual funds to rebalance portfolios.The transactions of underlying securities holdings in mutual fundsand target-date funds would be taxed.

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The tax would have the same effect as increasing the averageexpense ratio on an equity mutual fund in a 401(k) by 31 percent,said Antoniewicz.

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Money market fund investors would make out even worse. Moneygoing into the funds would be exempted, but the tax would apply asmoney is redeemed and moved to other investments. In 2018, thatwould have meant an additional $20 billion in costs, or a reductionof 71 basis points on the return of money market funds, accordingto Antoniewicz.

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“Transaction taxes hit Main Street—not just Wall Street,” shesaid.

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Reaching beyond the target

The high frequency trading the Wall Street Act hopes to curtailis not found in 401(k) plans, says Jack Towarnicky, executivedirector of the Plan Sponsor Council of America.

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Mutual fund sponsors and plan administrators already placeprohibitions on excessive trading in 401(k) accounts, he said.

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“If targeting high-volume traders is the goal of thelegislation, then you have to ask whether or not the legislationmatches the goal,” said Towarnicky. “It seems to reach well beyondthe intended target.”

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The tax would create administrative complexities and costs for401(k) plans, says Towarnicky, as some transactions would triggerthe tax, and some would not. Moreover, the 10 basis points in newtaxes would exceed the current cost of administering 401(k) plansfor more than half of today's plan participants.

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Management of public and privately sponsored defined benefitplans would also be impacted.

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“The impact is not limited solely to high-volume trading,” addedTowarnicky. “It reaches down to rank-and-file America. If they aregoing to exclude certain transactions, perhaps they should considerexcluding retirement plan assets as well.”

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According to ARA's Graff, 70 percent of 401(k) participants makeless than $100,000 a year.

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“These are not 'high rollers,' and there's no high frequencytrading occurring in 401(k) plans,” said Graff. “Warren Buffet maynot care about his $19,000 contribution to his retirement plan, butmost Americans do.”

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