Financial Transaction Taxes Gain Traction

At least since the Reagan-Thatcher era, the political climate has been hostile to taxes. Nobody thinks kindly of them. Even fresh proposals with some merits, such as flat tax rates and consumption levies, make little headway with politicians and public opinion.

A case in point is the financial transaction tax, an innovation—if that label still applies to a 40-year-old idea—that has effectively been shouted down in the banking capitals of London and New York. The opposition carried the day when French President Nicolas Sarkozy failed to win an official endorsement of his FTT proposal at the November Group of Twenty (G-20) meeting in France.

Still, the pro-FTT forces may be gaining ground. They had a powerful spokesman at the November meeting in the person of Microsoft Corp. chairman Bill Gates, with support from the likes of German Finance Minister Wolfgang Schäuble and the archbishop of Canterbury. Although consensus was lacking within the G-20, a poll of the leaders would show more leaning in favor of an FTT than not.

With public opinion still running against the financial sector, in part because of a perception that it was not sufficiently punished for the crisis of 2008–09, the industry is not invulnerable. The Obama administration has been anti–transaction tax, but it has proposed a financial crisis responsibility fee designed to penalize excessive leverage and force large banks to pay back benefits received from the Troubled Asset Relief Program.

But what of the merits of the financial transaction tax?

为简单起见,优雅和盈利potential, few if any forms of taxation can match it. Depending on the rate and tax base, it could raise tens to hundreds of billions of dollars annually, perhaps enabling paydowns of sovereign debt, investments in infrastructure or, as Gates and many nongovernmental organizations are urging, new antipoverty program and emerging-markets development. “Some modeling suggests that even a small tax of 10 basis points on equities and 2 basis points on bonds would yield about $48 billion on a G-20-wide basis,” Gates wrote in a report for the summit.

The FTT has its origins in the Tobin tax, named for late Nobel laureate James Tobin. Amid concerns about excessive, destabilizing speculation in foreign exchange trading in the 1970s, the longtime Yale University economist said that a transaction tax “would throw some sand in the well-greased wheels” of that market. Tobin believed the tax “would restore a degree of control over monetary policy for central banks, particularly during financial crises,” Howard Wachtel, emeritus economics professor at American University in Washington, wrote in a 2001 paper.

As financial crises have come and gone, so have variations on the Tobin theme. Transaction taxes are not unheard-of. FTT advocate Dean Baker, co-director of the Washington-based Center for Economic and Policy Research, notes that the U.S. had a 0.02 percent stock transfer tax from 1914 to 1966, and something similar funds its securities and derivatives regulation. The U.K. has imposed a stamp duty on securities transfers since the 1980s.

Jeffrey Sachs, an FTT proponent and head of the Earth Institute at Columbia University, has said that New York State collects $16 billion a year in stock transfer taxes but rebates them, so there is “no net tax.”

Two Democrats in Congress, Representative Peter DeFazio of Oregon and Senator Tom Harkin of Iowa, have introduced a bill calling for a 0.03 percent tax on stock, bond and derivative trades.

Whether the rationale is revenue enhancement, sand in the wheels or punishment, the financial community doesn’t want any part of it. Exchange executives bristle at the mention of higher transaction costs, anticipating adverse effects on liquidity and quote spreads. “There has to be a better way to implement a tax than to interfere with price discovery and capital-raising,” Joseph Mecane, chief administrative officer for U.S. markets at NYSE Euronext, said at a recent Securities Industry and Financial Markets Association meeting.

Robert Litan, a legal and economics expert affiliated with the Ewing Marion Kauffman Foundation and the Brookings Institution—hardly havens of antitax ideologues—believes an FTT “would significantly reduce liquidity and thereby potentially widen volatility. And by reducing the number of transactions, it would not raise anywhere near the revenue suggested.” Economics professor Wachtel sees in an FTT the “twin virtues” of preventing crises and giving regulators time and flexibility to respond when they do occur.

That could make for an intriguing debate, but in the end, lobbying power tends to prevail. Financial industry strategists might do well to call in the reinforcements.

Jeffrey Kutler is editor-in-chief of Risk Professional magazine, published by the Global Association of Risk Professionals.