With the resurgence of COVID-19 in many states across the country, millions of people out of work, and a pivotal political election quickly approaching, Americans are faced with unprecedented uncertainty about the road ahead. One thing Americans should never have to question, however, is the peace of mind of being able to access their long-term savings.
Whether they are saving for their children’s college education, retirement or other life milestones, investors deserve to know that their capital is protected and is available at a moment’s notice. To ensure the security of these savings, it is essential that America’s capital markets continue to operate efficiently and effectively, and that automated traders can continue to provide dependable liquidity – the ability for investors to buy and sell stock – in times of market volatility.
Over half of American households are invested in the stock market, either directly or indirectly through contributing to mutual funds, 529 College Savings plans, pension plans, 401(k)s or IRAs. For these Main Street investors, dependable liquidity and properly functioning markets are vital to accessing their capital.
As the potential for a shift in political power inches closer, it will be of paramount importance for Congress to continue safeguarding the U.S. capital markets from damaging policies, such as a financial transaction tax, that would eat away at the savings of millions of Americans.
The financial transaction tax (FTT), which has been championed by several congressional Democrats, would place a tax ranging from 0.05-0.2 percent on all equity, debt and derivatives trades transacted in the United States. In fact, Joe Biden’s running mate, Sen. Kamala Harris proposed an FTT which would tax stock trades at 0.2 percent and bond trades at 0.1 percent.
The FTT has been framed as a tax on Wall Street – but the harsh reality is that the FTT would be a huge blow to average American families across all income categories. As Congress searches for revenue raisers following trillions of dollars spent on COVID-19 relief packages, it is important to take a tax that would come directly from the pockets of Americans’ savings accounts completely out of the running.
In addition to negatively impacting Main Street directly through taxing their savings, the FTT would also severely damage the health of the U.S. capital markets by reducing liquidity in the capital markets and making trading more expensive for all investors. The cost of trading has come down significantly over the past several years and many retail brokerages now charge zero commission for making trades. In mid-March, the American capital markets witnessed historic levels of volatility as the COVID-19 pandemic swept across the U.S. However, despite the extreme volatility, the capital markets were able to withstand the storm in large part thanks to automated traders, who pump dependable liquidity into the markets, even when others are afraid to trade during a sell-off.
Instead of systems crashing, the markets continued to operate efficiently, investors were able to easily buy and sell securities, with bid-ask spreads narrower than they were during the Great Financial Crisis. For Main Street investors, narrow bid-ask spreads and dependable liquidity from automated traders are essential, as these fundamentals work to stabilize the market during times of turbulence.
Although the markets have rallied considerably since March, it is hard to ignore the disconnect between the markets and the economy. The U.S. officially entered a recession in February and the nation continues to face Depression-era levels of unemployment. This has led market pundits and analysts to warn that the market could experience a 10% correction or more by the end of 2020, especially if the health crisis worsens.
A market correction of this magnitude would be detrimental to average Americans’ retirement and other savings accounts. However, even if we experience another downturn, investors can rest assured that the capital markets will remain intact and stable because of the dependable liquidity that exists in our markets.
The COVID-19 pandemic has clearly proved to be a turning point in history and will very likely change many facets of life as we once knew it. Much of our nation’s physical and financial health are in the hands of policymakers in Washington and elsewhere, whose decisions will impact our country for years to come.
Regardless of the outcome of the November election, it is up to policymakers to ensure that incentives remain to keep our markets liquid and that disincentives, such as the FTT, are avoided so that Americans can continue to depend on our financial markets to operate smoothly and efficiently.
The bottom line is that the FTT would put further financial strain on many Americans who are already facing the possibility of losing their jobs or contracting the Coronavirus. Despite what may be good intentions from lawmakers, an FTT would be a serious step in the wrong direction.
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