Bernie Sanders has a plan to erase student debt by taxing Wall Street. But industry watchers tell us it will hurt Main Street more.

The debate over high-frequency trading

Much harder to calculate are the potential implicit costs of having FTT. The MMI says it could disincentivize trading and reduce the efficiency of capital markets in the US. Wegner also argues that the tax could put a damper on the high-frequency trading — a practice he says adds liquidity to markets.

As an extension of that, another commonly cited argument in favorite of FTT is that it reduces market volatility by clamping down on the type of trading that increases it. But a 2012 study by the Bank of Canada suggested that it could actually make price swings worse.

"It's going to discourage the arbitrage process and cause much more of a disconnect across markets and result in less fair prices," Chester Spatt, a professor of finance at Carnegie Mellon University, told Markets Insider. "I can't believe that candidates that believe in fairness want the prices in our marketplace to be much less fair than they are at present."

Dean Baker, a senior economist and the co-founder of the Center for Economic and Policy Research, points out that even if trading volume gets cut in half — a conceivable outcome in his mind — trading volume would still be roughly what it was in the 1990s.

"We clearly want vibrant markets, deep markets," Baker said. "I would be very hard pressed to say we didn't have deep capital markets in the 90s."

Baker also said that lower trading volume would save investors in the long run.

"The savings on reduced trading will offset the increase in the cost per trade," Baker said. And, he argued that the small increased costs that investors might see would be worth it for something as important as free college.

Howard Gleckman, a senior fellow at the Tax Policy Center, minced no words with his take on the matter.

"Shutting down the flash boys would slash the revenue Sanders needs to pay for free college," he said.

Past failures

Implementing something like FTT would hardly be a new idea, considering other governments have tried similar measures in the past.

In fact, they aleady exist in many countries such as Britain, South Korea, Hong Kong, Brazil, Germany, France, Switzerland, and China. But FTT-like measures haven't always worked.

And then there's the unique case of Sweden. From 1984 to 1991, the nation applied a financial transaction tax of 0.5% to purchases or sales of equity securities, fixed income securities, and financial derivatives.

The tax ultimately decreased trading volume of the most popular share classes by 60%, and much of Swedish equity trading moved offshore, according to the Tax Foundation. As a result, the tax raised far less money than was expected and was considered a failure.

More recently, the European Union has also been trying to implement its own financial transaction tax since 2011. But it's had little luck because of arguments that the tax wouldn't raise as much money as previously thought. Projections for how much the tax would actually raise have actually been dramatically lower than when the tax was first proposed.

In 2013, the EU projected the tax would raise as much as 35 billion euro annually. The latest estimate based on the performance of a similar tax in France is 3.45 billion euros, according to the Tax Policy Center, a nonpartisan think tank based in Washington DC.

Alternate plans already in the works

US Senator Brian Schatz of Hawaii and US Representative Peter DeFazio of Oregon have already introduced legislation that also proposes a financial transaction tax, meant to address economic inequality. The Wall Street Tax Act proposes a smaller tax than Sanders' plan — it would levy 0.1% tax on the sale of stocks, bonds, and derivatives. It's estimated that it would raise $777 billion over a decade.

According to Baker, this plan may make more sense in the market currently.

"I don't think the Sanders plan will freeze up the markets, but I'd rather start with something smaller," he said. One good thing about the Sanders plan, he said, is that it is scaled for different assets.

Still, the Sanders campaign is very confident in analysis that shows the proposed plan could raise up to $220 billion in the first year and $2.4 trillion over ten years, Sarah Ford, deputy communications director of Bernie 2020, told Markets Insider in an email.

"Some 40 countries throughout the world have imposed a similar tax, including Britain, South Korea, Hong Kong, Brazil, Germany, France, Switzerland and China and their capital markets function just fine," Ford wrote.

She continued: "Placing a 0.5% tax on stock trades — 50 cents on every $100 of stock — a 0.1% fee on bond trades, and a 0.005% fee on derivative trades to pay for free college and student debt cancellation a decade after Wall Street's gambling tanked the economy is exactly what this country needs to create an economy that works for all."