The $2 Trillion Mirage: Why an FTT is an Economic Impossibility
As President Trump’s team considers eliminating the federal income and payroll taxes, they will need to find other sources for the $4.6 trillion raised by those taxes.
There seems to be universal agreement that consumption taxes grow an economy faster than other forms of taxes. However, in D.C. the problem with consumption taxes is that they clearly show Americans how much the government is taking from them.
They prefer the income tax because much of the tax burden is hidden in the prices we pay for goods and services, and most people don’t pay attention to the amount withheld from their paycheck.
If the FAIRtax is enacted, each time a person makes a new retail purchase they will see the 30% tax. Even though, after the prebate, the real cost of the tax may be zero, the consumer will still be upset that it is so high.
This is why many in D.C. look eagerly at the Financial Transaction Tax (FTT). They see trading volumes measured in the quadrillions of dollars and think that if the government could just skim a tiny percentage off the top, it could generate $2 trillion of the $4.6 trillion needed to replace the revenue from the income/payroll tax. Then the FAIRtax rate could be reduced to say 10%--a much more easily sold percentage.
More importantly, no U.S. citizens would see the FTT because it would be hidden in the prices of the things we buy.
While a modest FTT might raise some revenue, designing an FTT to raise $2 trillion per year is not just ambitious—it is an economic disaster. Such a tax would evaporate the very tax base it seeks to exploit.
The pitch is simple: the financial sector is awash in money. If the government could just skim a tiny percentage off the top, it could fund everything from climate transition initiatives (estimated at $2 trillion annually) to the entire federal deficit.
The primary argument for a massive FTT rests on a dazzling number: the notional (face) value of financial contracts. In the derivatives market alone, U.S. commercial banks hold contracts with a notional value exceeding $200 trillion according to the Office of the Comptroller of the Currency (OCC). Proponents argue that a 1% tax on this amount would yield $2 trillion effortlessly.
But this calculation makes a critical error: it confuses notional (face) value with economic value.
Consider an interest rate swap. The "notional" amount might be $100 million, but no such sum changes hands; the contract merely swaps interest payments on that amount. The actual market value might be a fraction of a percent. Taxing the full notional value at 1% would often exceed the entire potential profit of the trade.
If you tax a transaction at a rate higher than its profit margin, the transaction ceases to exist and generates zero tax revenue.
Current "modest" FTT proposals (like the Inclusive Prosperity Act) aim for roughly $60 billion to $220 billion annually using rates around 0.1% to 0.5% (see Tax Policy Center estimates). To leap from there to $2 trillion requires a tenfold increase in tax rates, pushing them into the range of 4-5% per trade.
This leads us to the Laffer Curve—the economic principle that says as tax rates rise, revenue eventually falls because economic activity declines.
- Elasticity: Markets are highly "elastic." When transaction costs rise, volume falls. Academic estimates, such as those found in IMF Working Papers, suggest that for every 10% increase in cost, trading volume drops by 15% or more.
- The Breaking Point: At the rates required to raise $2 trillion, high-frequency trading (which provides the vast majority of liquidity) would vanish instantly. The "base" of the tax would shrink by 80-90%, leaving the government with a high tax rate applied to a graveyard of a market.
You do not have to rely solely on theory. History provides a brutal case study.
Between 1984 and 1991, Sweden experimented with aggressive financial transaction taxes. The results, documented in studies like Financial Transaction Taxes: The Swedish Experience, were catastrophic:
- Bond Market Collapse: Trading volume in Swedish bonds fell by 85%.
- Derivative Extinction: The futures market volume plummeted by 98%, and the options market essentially disappeared.
- Capital Flight: Half of all Swedish equity trading migrated to London to avoid the tax.
Most damning of all, the tax raised only 3% of its projected revenue. The Swedish government eventually repealed the tax, admitting that it destroyed market liquidity while failing to fill the treasury.
Many in D.C. believe that the FTT is a tax solely on wealthy speculators. In reality, its costs, like all taxes, cascade down to the real economy, hitting retirees and corporations the hardest.
Institutional investors—pension funds and 401(k) plans—are the largest holders of U.S. equities. An FTT acts as a constant drag on their returns.
- A Vanguard analysis estimated that even a "small" 0.1% tax could reduce the ending value of a retirement portfolio by 19% over 20 years.
- This drag would force the average saver to work roughly 2.5 years longer to achieve the same retirement goal.
- Under a $2 trillion tax regime (with rates 10x higher), the compounding damage would likely render the traditional 401(k) model unviable.
Liquidity is the ability to buy or sell an asset quickly without moving the price. In the U.S. Treasury market—the bedrock of the global financial system—liquidity allows the government to issue debt cheaply.
- An aggressive FTT would widen "bid-ask spreads," making it expensive to trade Treasuries.
- If Treasury yields rose by just 0.50% due to this liquidity crisis, the interest costs on the national debt would rise by roughly $170 billion annually (based on CBO debt service projections), wiping out much of the revenue the tax hoped to collect.
Conclusion
The financial sector looks like a giant piggy bank. But the financial system is not a static vault of gold; it is a dynamic, flowing river.
Attempting to dam this river with a $2 trillion tax target would not capture the water; it would dry up the stream. The capital would flee to London, Singapore, or decentralized finance platforms, leaving the U.S. with a broken market, a higher cost of borrowing, and a retirement crisis.
The answer is the FAIRtax, a national retail sales tax on new retail goods and retail services, provides a family credit so that all purchases up to the poverty level for each family are not taxed. There is no withholding from your paycheck and YOU NEVER HAVE TO FILE A TAX RETURN TELLING THE GOVERNMENT HOW MUCH YOU EARNED AND HOW MUCH YOU SPENT, AND YOU’LL NEVER BE HARASSED BY THE IRS EVER AGAIN.
Many of you have labored tirelessly for freedom from the federal income tax and the IRS. You deserve a great deal of credit for your efforts to educate the American people on the need to fund the American government in a way that is good for America and returns freedom to the American people.
It is imperative, though, that we don’t replace the current income tax and the IRS with an alternative system that can still be manipulated by the Ruling Elite. We must let Congress and the President know that the best way to replace the income tax and the IRS is with the FAIRtax.
Make no mistake about it. The FAIRtax is a grave threat to the Ruling Elites. It will strip them of their power and their ability to control us though the tax system. Their opposition to the FAIRtax will be fierce and unrelenting. And don’t think for an instant that they won’t use half-truths, deception and downright lies in their desperate attempt to hang on to their power.
However, with the support of this President, we can finally eliminate the income tax and the IRS!!!
Of course, the best course of action is to not only repeal the income tax and abolish the IRS but to repeal the 16th Amendment as well so no future administration can ever shackle the American people with an income tax again.
We must come together and ensure that real tax reform, the FAIRtax, is not subverted by the Elites in D.C.
This will take the diligent efforts of all of us. We need your financial assistance, and we need your grass roots assistance.
If you have contacts that will allow us to get more information to President Trump about the FAIRtax please let us know.
Please email us at info@fairtax.org and we will give you some options on how you can best help us.
At a minimum, please call your Congressional representative and ask if he or she supports the FAIRtax. If so, thank him/her for their support and suggest they become a cosponsor of HR-25 if they’re not one already. If not, ask why not. If your representative claims to be unfamiliar with the FAIRtax, offer to have someone come to their office and explain it to them.
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THE SOLUTION—PASS THE FAIRTAX!
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Isn’t it time to end this ludicrous tax collection system and the IRS?
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