Financial Transaction Tax

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A financial transaction tax (FTT) is a government levy placed upon parties involved in a financial transaction, such as the trading of a stock, bond or derivative. Examples of proposed FTTs include the "Tobin tax" and the "Robin Hood tax." The rationale behind a FTT is both to curb excessive speculation and to raise revenue.[1]

Financial transaction taxes exist in Britain, Switzerland, South Korea, Hong Kong, some countries in Europe and other developed markets and emerging nations, usually at rates of 0.1 percent to 0.5 percent.

Background

In 1972, James Tobin, Nobel laureate in economics, proposed a tax on foreign currency transactions to counteract the constraints that exchange rate speculation had on central banks wishing to maintain autonomy. The idea was that the tax would reduce trading volume and thus reduce the amount of excessive speculation.

Transaction Tax in Europe

Sweden was the first to experiment with a tax on financial transactions in the 1980s. It levied a 0.5% tax on the purchase or sale of equity securities. The tax was doubled in 1986 and then lowered, and in 1991 it was abolished after it led to disappointing revenues as equities and derivatives trading moved from Stockholm to London.[2]

On August 1, 2012, France imposed a tax on financial transactions of 0.1 percent.[3] When French President Nicolas Sarkozy first announced the tax, the idea met with resistance from British prime minister David Cameron, who called the idea “quite simply madness.” [4]

In February 2013, the European Commission tabled a proposal to implement the union-wide transaction tax first proposed in 2011. Discussions continued into 2014, however, and once the framework has been agreed upon at the European level, participating Member States will have to transpose the Directive into national legislation.[5]

In 2019, ten EU countries provisionally agreed to adopt a minimum 0.2% levy on equity trades of companies based in the EU with a market capitalization of 1 billion euros ($1.12 billion). This pending accord was forged after more than five years of negotiations. On June 14, 2019, Germany and France began pushing European Union finance ministers to rally around the financial transaction tax, which they say could help fill a potential EU Brexit budget hole.[6] The levy is based on the tax already in place in France.[7]

Transaction Tax in the U.S.

A federal transaction tax was imposed in the U.S. for much of the 20th century, but was gone by the mid-1960s.

The idea has been revived several times in the United States, including after the financial crises in the U.S. and Europe in 2008-2011 as a means of raising revenue to pay for reform. [8]

The transaction tax idea also reappeared in the U.S. in 2014 amid the debate over high frequency trading, and as a possible solution to the growing wealth disparity between households in the top one percent in terms of wealth, and the other 99 percent. In January 2015, the House Budget Committee proposed a transaction tax as part of an "anti-inequality" package.[9]

On January 29, 2016, the New York Times editorial board called for a financial transaction tax on U.S. stocks, bonds and derivatives. Democratic presidential candidates Hillary Clinton and Martin O'Malley both called for a tax on certain high-frequency trading firms' activities, and Democratic candidate Bernie Sanders called for a broader tax to raise revenue from Wall Street, but the Times editorial said his proposal might squeeze investors too hard. Republicans are against a financial transaction tax.[10]

The industry and other critics have said such a tax would weaken markets and hurt small investors, especially Americans trying to save for retirement, because their money is often invested in mutual funds that trade frequently in order to maximize returns. Opponents of the tax have also contended that it would be ineffective because it could be easily avoided. In March 2016 the Investment Company Institute urged House Budget Committee ranking member Chris Van Hollen not to include a transaction tax in any Democratic budget plan.[11]

References

  1. What is a Tobin Tax?. BBC.
  2. Sweden Explains Why a European Financial Transaction Tax Won't Work. Business Insider.
  3. French president Nicolas Sarkozy to bring in 0.1pc Financial Transaction Tax in August. The Telegraph.
  4. Cameron rebukes euro leaders over crisis. Financial Times.
  5. Taxation of the financial sector. European Commission.
  6. Financial Transaction Tax May Help EU Fix Brexit Budget Shortfall. Bloomberg Tax.
  7. EU tries to revive plan for financial transaction tax. Reuters.
  8. Schaeuble vows to push for financial transaction tax. Reuters.
  9. In search of a plan to close the wealth gap. Washington Post.
  10. New York Times' editorial board calls for financial trading tax. Reuters.
  11. Wall Street Pushes Back on Trading Tax. The Hill.