Financial Transaction Tax

Concerns about volatile financial markets and the search for new sources of federal revenue have spurred interest among lawmakers and other commentators in imposing new taxes on securities transactions. Generally, a “financial transaction tax” (also known as a “securities transaction tax”) could apply to the value of trades in stocks, bonds, mutual funds, exchange-traded funds (ETFs), futures and options, other derivative instruments, and other securities.

While a financial transaction tax can be structured in a variety of ways, ICI believes that any such tax could harm individual fund investors who are investing to meet retirement, education, and other financial goals.

For fund investors, a financial transaction tax would raise the cost of trades that a fund makes for its portfolio and would depress fund returns. Depending on how the tax is structured, it could subject mutual fund and ETF shareholders to double taxation—for example, if the tax is collected both on trades in fund shares and on stock trades that mutual funds routinely engage in to invest shareholder cash, meet shareholder redemptions, and adjust fund portfolios. If the tax is applied to shares in money market funds, it would place a heavy burden on their shareholders, many of whom buy and sell shares frequently because they use these funds as transaction accounts.

Some financial transaction tax proposals have tried to exempt individual fund investors. However, no matter how it is structured, such a tax could harm individual fund investors and could create market distortions that would reduce the efficiency of markets for all participants—including fund investors—by reducing market volumes, impairing liquidity, and distorting price discovery.