Europe Proposes Financial Transaction Tax


On September 28th, the European Commission (“EC”) proposed the introduction of a plan to tax financial institutions on derivatives and other financial transactions each time at least one of the parties to a transaction is located within the 27 member-state European Union. In outlining the plan, EC President Jose Manuel Barroso noted that the public sector had provided €4.6 trillion in aid and guarantees to the financial sector and that it was now “time for the financial sector to make a contribution back to society.” The tax would become effective in 2014 and, if enacted, is expected to raise approximately €57 billion per year.

To avoid evasion by transacting in economically-equivalent (or similar) products, the plan would have a broad application, covering equities and bonds (which would be assessed a 10 basis point tax), as well as derivatives (which would be assessed a 1 basis point tax). Significantly, currency derivatives would be covered by the tax, although foreign exchange spot transactions—which constitute some $1.5 trillion of the $4 trillion average daily turnover foreign exchange market—would be exempt from the tax. Primary market transactions (which include sovereign and corporate bond auctions), private household transactions (such as home mortgages) and transactions with central banks also would be exempt. The purpose of the contemplated tax appears to be two-fold: to curb speculation and raise revenue, including possibly to support or recoup losses from member-state bailouts.

The idea of a financial transaction tax is not new and is perhaps most notably tied to Nobel prize-winning economist James Tobin, who argued for its application in the 1970s (consequently, financial transaction taxes are often referred to as a “Tobin taxes”). Opponents of the tax argue that it would merely constitute another cost passed on to customers and that, unless it were globally implemented, would lead to a decrease in trading activity where it applies.[1] Supporters of the tax contend that these claims are exaggerated. If such a tax indeed is applied on a “per transaction” basis, it may especially impact high-frequency trading—which may now account for the majority of trading volume on exchanges—due to the sheer number of trades transacted.

Implementation of the plan would only occur throughout the European Union if, ultimately, the tax is ratified by each of the member states, which is not certain.[2]

In the United States, a financial transaction tax was briefly considered in the House of Representatives in 2009. Secretary of the Treasury Timothy F. Geithner has stated his opposition to such a tax, arguing that it would negatively impact liquidity and exacerbate the financial crisis without reducing volatility or risk-taking.[3] However, on October 4th, two lawmakers introduced a proposal for a financial tax on equities, bonds and derivatives in the United States. Estimated revenues from such a tax have not yet been released, although the 2009 proposal had estimated revenues of up to $150 billion per year.

[1] Note that EC President Barroso on October 5th in fact announced that the EC would propose a global financial tax at the November 2011 meeting of the G20.

[2] There appears to be a sharp difference of opinion about the tax among international regulators and, within the European Union, member-states. Germany and France, in particular, have been vocal supporters of the tax, while the United Kingdom and Sweden oppose it. Sweden has some experience in the assessment of financial transaction taxes, as it had imposed such a tax on equity and bond transactions between 1984 and 1991.

[3] Seven industry groups (including the U.S. Chamber of Commerce) wrote to Secretary Geithner on September 22nd to reiterate their opposition to a financial transaction tax, noting that it would harm the entire U.S. economy, as it would “impede the efficiency of markets, impair depth and liquidity, raise costs to issuers, investor, and pensioners, and distort capital flows by discriminating against asset classes.” This letter may be found at .pdf. Note that a small tax (i.e., 2-4¢ per $100 of stock) in fact existed on stock transfers in the U.S. from 1914 until 1966.