The Numbers Don’t Add Up In The College For All Act

On April 21, Senator Bernie Sanders (I-VT) and Representative Pramila Jayapal (D-WA) introduced the College for All Act (S.1288/H.R. 2730). This legislation would make community college and trade schools tuition-free for everyone and eliminate tuition and fees at public colleges and universities for families making less than $125,000 annually. Additionally, it would make an annual $10 billion investment in student support programs, double the maximum Pell Grant, triple federal TRIO, and double GEAR UP funding. All of this would supposedly be paid for by an innocent-sounding tax on Wall Street investors. However, in reality such a tax would fall on millions of American savers. Further, the history of financial transaction taxes (FTT) casts doubt of whether a fraction of the projected revenue will be recouped by this tax.

According to the press release from Senator Sanders, the College for All Act would be paid for by the Tax on Wall Street Speculation Act (S. 1283), which imposes a tax of 0.5 percent on stock trades, a 0.1 percent fee on bonds, and a 0.005 percent fee on derivatives. Proponents of this pay-for predict that this tax would raise $2.4 trillion over the next decade. This is not a new proposal: liberal lawmakers have floated similar taxes as a way to pay for other progressive priorities like Medicare for All. However, while portrayed as a tax on the wealthy, this bill would threaten Main Street investors and Americans saving for retirement.

Proponents of an FTT portray it as a targeted tax on wealthy individuals, hedge fund managers, and high-frequency traders. However, with 52 percent of Americans having a stake in the stock market, the scope of this tax is much larger. Many Americans are responsibly saving for their future in the form of 401(k)s, 529 College Saving plans, pension plans, or IRAs. According to the College Saving Plans Network, there are over 14 million active 529 College Saving Plans . Ironically, the College for All Act would tax college savings in an attempt to make college more “affordable.” A Modern Market Initiative study looked at the effect of an FTT, similar to what is proposed in S.1283, and found that a hypothetical 529 College Savings plan with $12 billion in assets would experience a negative impact of $19 million annually. This study also found that an FTT would cost 401(k)s $64,232 annually, or the cost of working an additional two years.

The sanguine picture of forcing Wall Street fat cats to pay for college isn’t the only thing this proposal gets wrong. The $2.4 trillion over 10 years this tax would supposedly generate is likely far higher than what would actually occur. The fact sheet from Senator Sanders says that 40 countries have imposed an FTT but fails to mention the troubles that followed for countries that tried to implement an FTT. From 1984 to 1991, Sweden implemented an FTT which caused 30 percent of the market to move to London. France, mentioned as an example in Senator Sanders’ fact sheet, projected an FTT would raise €1.5 billion annually, but peaked at less than half of that. The Tax Foundation notes that countries are implementing and abandoning FTTs at similar rates. Not only will Senator Sanders’ FTT proposal likely fail to raise the projected revenue, but there are other economic consequences that can cascade from the higher cost associated with buying and selling stocks.

One reason why an FTT fails to raise the projected revenue is it raises the cost of trading and decreases the trading volume. As trading volume decreases, so does the base for the tax. Making matters worse, an FTT would decrease liquidity in the market and make it more difficult for businesses to raise capital. Less capital for businesses can result in less job and innovation for Americans. Investors are also disincentivized from participating in the stock market and investing. A poll from the U.S. Chamber of Commerce Center for Capital Markets found that 51 percent of voters would be less likely to invest if an FTT was implemented. The poll also found broad and bipartisan opposition to the tax, with a majority of Democrats, Republicans, and Independents opposing the tax.

Making higher education affordable and accessible for more Americans is an important topic that Congress should continue to look into. However, taxing American savers - including taxing college saving plans - is likely to fail to raise the revenue needed to pay for the College for All Act. Main Street investors have benefited from the lower costs associated with trading stocks, and the majority of Americans now participate in the stock market. This attempt to tax the rich will also levy taxes against the very people it's supposed to help. Congress should not make investing less affordable and lock out the majority of Americans from saving for their future. Lawmakers should listen to Main Street investors and abandon this ill-advised tax.