Advisers split on proposals for financial transaction tax

Some say it’s a smart way for government to raise revenue; others say it penalizes investors

Imposing a financial transaction tax is a popular idea among Democratic presidential candidates but receives mixed reviews from financial advisers.

The latest Democratic White House hopeful to propose such a levy is Michael Bloomberg. The former New York City mayor would place a 0.1% tax on all stock and bond sales, as well as on payments on derivatives contracts. He would phase the tax in starting at 0.02%.

An outline of Mr. Bloomberg’s financial reform agenda said a financial transaction tax could defray the costs of market regulation, fund needed social spending and “help address inequality.” It also asserted that the increasing speed of trading “isn’t always socially beneficial.”

Taxing high-frequency traders is OK with George Reilly, founder of Safe Harbor Financial Advisors. He said the levy wouldn’t burden his clients, who are encouraged to use a passive investment plan allocated mostly to low-cost index funds.

“To the extent a financial transaction tax would discourage active trading and market-timing activities and get folks in a more strategic investment planning mode, I think it can be beneficial,” Mr. Reilly said. “We do need to generate more revenue for essential government benefits and services, and if some of that can come from folks who want to play the market, that’s fine with me.”

Steven Stanganelli, owner of Clear View Wealth Advisors, said a financial transaction tax generally wouldn’t hit his clients, who mostly buy and hold.

“The biggest impact may be on high-velocity traders,” Mr. Stanganelli said. “But since I mainly use ETFs and both open-end and
closed-end funds, I doubt that the impact will be noticeable.”

One way a financial transaction tax would make its presence felt is by helping reduce the federal deficit, he said. “We have as far as the eye can see deep-red deficits. This is one way to generate revenue to help offset that.”

Brokerage industry trade associations are protesting the notion of a financial transaction tax, arguing that it will hurt ordinary investors.

“A financial transaction tax would tax middle-class savers, including pension funds, 401ks and IRAs,” Kenneth Bentsen Jr., chief executive of the Securities Industry and Financial Markets Association, said in a recent statement.

Charles Shipman, managing principal at Blue Keel Financial Planning, agrees that ordinary investors will feel the pain of a financial transaction tax.

“An FTT will penalize the average investor who believes in portfolio diversification because rebalancing throughout the year will trigger additional transaction costs,” Mr. Shipman wrote in an email. “Imposing a tax on each trade discourages rebalancing, which results in investors bearing more risk as asset prices fluctuate and allocations become misaligned.”

Mutual fund investors also would be hurt, he said. He cited Morningstar statistics that show portfolio turnover for a domestic stock fund averaged 63% last year. If fund managers have to pay a tax on all those transactions, such costs would inevitably be passed through to investors.

“Billionaires don’t invest the bulk of their wealth in mutual funds or 401(k) plans,” he wrote. “Average American investors do.”

Matt Chancey, an adviser at Dempsey Lord Smith, opposes a financial transactions tax because it targets the wealthy to pay for social spending.

“The FTT is designed to extract additional taxes from clients that have been good savers to pay for things” they don’t need, Mr. Chancey said. “That’s an egregious additional tax that the rich are now forced to pay. One day, politicians will wake up and realize you can’t just continue to tax the rich for their agenda. The rich … will relocate to a more favorable tax haven.”

[More: Mohamed El-Erian puts Democratic tax proposals in perspective]