As talk increases of a financial transaction tax, some industry groups are raising the alarm that average Americans will be hurt by any such levy. Their warnings, however, misleadingly rely on selective and often inappropriate data, says Taylor Lincoln, research director for Public Citizen.
There is evidence that various financial industry groups have based their alarming estimates on a foundation of dubious assumptions. The costs of a financial transaction tax are highly dependent on the turnover rate of the underlying investments, and the anti-tax groups have tended to plug suspect turnover numbers into their models.
Here's an example of a claim that could use more scrutiny. Mutual fund company Vanguard issued a brief paper in September claiming that the average retirement saver would have to work an extra 2½ years if a 0.1% tax on financial trades were implemented. Vanguard's paper provided little insight into how it arrived at its conclusion but did include one key detail. The paper said its calculation was based on an investment in a small-capitalization actively managed fund.This was a strange choice. Vanguard, of course, is famous for pioneering passively managed index funds. Actively managed funds tend to have much more turnover than index funds.
A Vanguard spokesman e-mailed Michael Edesess, an author of consumer financial advice books and a financial professional, that the financial transaction tax costs for an investor in its total market index fund would be 1/20th as much as for investors in the small cap fund.
Other industry studies have either cited the Vanguard findings, invoked their own suspect methodologies and/or withheld key details on how they arrived at their conclusions.
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