Financial Transaction Tax

They might call it the “Financial Transactions Tax,” or the “Tobin Tax,” or the “Robin Hood Tax,” or just the “FTT.” But by any name, it’s a fee paid any time a person or business buys or sells a share of stock, a bond, a futures contract, an options contract, or any of the commonly traded financial instruments.

WHY DO PEOPLE SUPPORT THE FINANCIAL TRANSACTIONS TAX?

FTT proponents say it would force banks and financial institutions to pay for the 2008 financial crisis. They argue that a small “Robin Hood Tax” on every financial securities transaction would raise hundreds of billions of dollars to reduce poverty and reverse global warming. And they say that a Financial Transaction Tax would stabilize volatile financial markets.

Are they right? Let’s find out.

WHO PAYS THE FINANCIAL TRANSACTIONS TAX?

· Matti Leppälä, Secretary General of the European Federation for Retirement Provision: “A tax that tries to shoot at everything that moves will most likely not hit the intended target, but it will kill or wound many innocent bystanders… this new tax would disproportionately impact pension funds and other institutions which provide retirement income.” [1]

· The Dutch Central Bank: “The DCB opposes the introduction of a European financial transaction tax that it estimated would cost the nation’s lenders, pension funds and insurers about 4 billion euros ($5.2 billion) and hurt economic growth.” The DCB study showed that 1.7 billion euros, over 42% of the annual FTT cost in the Netherlands, would be borne by pensions. [2]

· Lars Oxelheim, Professor of International Business and Finance at Sweden’s Lund University: “The FTT is presented as directed at the financial industry, but eventually the man in the street is the one to foot the bill… Just to give an indication, a 30-year-old worker, retiring at the age of 65, having a pension fund yielding 5 per cent per annum, with a turnover of the portfolio of 1.5 times a year, will see his pension reduced by 5 per cent due to the Tobin tax.” [3]

· Guus Warringa, Chief Legal Counsel of the Netherland’s APG Asset Management: “The rough calculations point to a multibillion euro damage just for Dutch pension funds… The man on the street will pick up the cheque.” [4]

WOULD THE ELDERLY AND CHARITIES BE PROTECTED IF THEIR RETIREMENT SAVINGS, PENSIONS, AND TRUSTS WERE EXEMPTED?

FACT:

Widows, widowers and others who depend upon annuities or life insurance policies for their economic survival, will lose about ten percent of the value of their insurance proceeds to the FTT.

“Using a simple transaction cost model, we can compute that a hedging strategy which cost 2.0% p.a. now will cost about 2.2% p.a. after the introduction of 0.1% transaction tax. This is a raise of 10% in insurance fees… These results are in line with DWS who computed that a so called Riester-Rente – a German annuity contract – where the customer pays 100€ per month over 40 years would lose about 10%. That means at maturity of the contract the customer receives 135,000€ instead of 149,000€.” [5]

FACT:

As insurance costs increase, so will premiums paid by consumers.

The Dutch Central Bank calculated that 7.5% of financial transactions costs in the Netherlands would be paid by insurance companies.[6]

FACT:

The FTT will cause economic hardship for charities and volunteer organizations.

“The Wellcome Trust, a charitable foundation with a £14bn ($22bn) investment portfolio, calculates an FTT would cost it £32m a year, equivalent to its 600-person strong programme in Kenya.” [7]

FACT:

FTT damages money market funds that conservative investors, retirees and pension funds depend upon to preserve capital.

From the Financial Times: “Most staggeringly, though, BlackRock estimates that its Euro Government Liquidity money market fund would incur an annual FTT bill of 782bps, entirely destroying the rationale for such a low-risk, low-return fund.” [8]

From EFAMA, the European Fund and Asset Management Association: “Europe’s proposed financial transactions tax would have cost the asset management industry €38bn had it been in place in 2011, destroying the entire money market fund sector in the process.” [9]

WOULD THE BURDEN OF AN FTT FALL PRIMARILY ON THE FINANCIAL SECTOR, OR ON THOSE INDIVIDUALS AND BUSINESSES ENGAGED PRIMARILY IN “FINANCIAL SPECULATION”?

FACT:

Non-financial businesses, working men and women, and ordinary investors pay the FTT.

The Center for Policy Studies: “Much of the burden would fall on bona fide businesses using financial services to manage their risks and improve the efficiency of their operations… In other words, an FTT would increase the cost of those financial products which are designed to reduce the risk borne by non-financial businesses.” [10]

Harvard economics professor, Kenneth Rogoff: “Worse still, over the long run, the tax burden would shift. Higher transactions taxes increase the cost of capital, ultimately lowering investment. With a lower capital stock, output would trend downward, reducing government revenues and substantially offsetting the direct gain from the tax. In the long run, wages would fall, and ordinary workers would end up bearing a significant share of the cost.” [11]

Desmond Tutu, former Archbishop of Cape Town, and Bettina Gronblom, Chief Executive of ‘Not Just for Profit’: “So how are we to correct the negative traits of Capitalism? A Robin Hood tax, or Tobin tax, has been suggested. Yet there is a risk that such a tax is more likely to hit investors than banks. And it is not yet clear how it would discourage risky behavior by banks.” [12]

The International Monetary Fund (IMF): Recommended in favor of direct taxation of financial institutions because the FTT’s “… real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector.” [13]

IF BANKS AND OTHER FINANCIAL INSTITUTIONS CAUSED THE ECONOMIC COLLAPSE, SHOULDN’T THEY BE HELD RESPONSIBLE?

· Christine Lagarde, former French Finance Minister and current IMF Managing Director: “The financial sector must contribute more, but I would tend to favor a system that is based on the sum of profits, compensation, and salaries, in general. I would not jump to the FTT [Financial Transaction Tax] because it is the FTT.” [14]

· International Monetary Fund direct bank tax recommendations:

“Financial Stability Contribution (FSC) linked to a credible and effective resolution mechanism. The main component of the FSC would be a levy to pay for the fiscal cost of any future government support to the sector.” [15]

“Financial Activities Tax (FAT) levied on the sum of the profits and remuneration of financial institutions, and paid to general revenue.”[16]

· MIT economics professor, Lael Brainard (currently US Treasury Undersecretary for Foreign Affairs): “We’re very much in sync with Europe on their goal of ensuring that large financial institutions bear their fair share of the burden, but the US-proposed ‘responsibility fee’ would better deter the kind of risky behavior that led to the crisis as well as ensure that large financial institutions and not retail investors bear the burden.” [17]

DOESN’T GREAT BRITAIN, ONE OF THE WORLD’S GREAT FINANCIAL CENTERS, HAVE A TRANSACTIONS TAX?

FACT:

Britain has a ‘stamp duty’ that’s paid only by the final purchaser or seller.

Banks, investment firms, and investment banks do not pay the UK stamp tax: “Because the UK tax code provides exemptions from the Stamp Duty Reserve Tax for all financial intermediaries, including market makers, investment banks and other members of the LSE, and due to the strong growth of the contracts for difference (CFD) industry, which provides UK investors with untaxed substitutes for LSE stocks, according to the Oxera (2007) report, more than 70% percent of the total UK stock market volume, including the entire institutional volume remained (in 2005) exempt from the Stamp Duty.” [18]

In addition to the 70% of London Stock Exchange (LSE) transactions that qualify as exempt, all UK transactions off the LSE (e.g., NYSE, CME, NYMEX, Euronext, OMX, etc.) and all currency and derivative transactions are also exempt from the stamp duty.

British Finance Minister George Osborne: “There would be no point introducing a financial transaction tax that led, the next day, to our foreign exchange markets moving to New York or Singapore or anywhere else.” [19]

DON’T SINGAPORE AND HONG KONG HAVE TRANSACTIONS TAXES?

FACT:

Singapore and Hong Kong have a limited ‘stamp duty’ similar to Great Britain’s. Like Britain, the tax is only levied on equity shares traded on local exchanges. There are numerous exemptions from the tax include futures, options, currencies, all off-local-exchange transactions and scriptless settlements.

Offsetting the impact of any stamp tax, Hong Kong and Singapore have zero percent capital gains tax rates[20] and some of the lowest income tax rates in the world. [21]

WOULDN’T AN FTT RAISE HUNDREDS OF BILLIONS OF DOLLARS TO BALANCE NATIONAL BUDGETS, END POVERTY AND REVERSE GLOBAL WARMING?

FACT:

In 1984, Sweden enacted an FTT in the hopes of raising billions to support social services. Futures trading volume fell 98%, options trading fell to zero, bond trading fell 80%, and most other markets’ volume fell dramatically as more than 50% of all Swedish trading moved to London. Total FTT taxes collected were less than 5% of what the Swedish Finance Ministry had originally projected and the FTT resulted in a net loss to the Swedish Treasury. The tax was repealed in 1991. [22]

Anders Borg, Sweden’s current Finance Minister: “We have substantial experience in Sweden… And from the Swedish perspective, we cannot foresee that we would introduce such a tax in our system again.” [23]

FACT:

The European Union (EU) has been considering imposing an FTT on all transactions within the EU. The initial report estimated that the FTT would generate €57 billion in revenues every year. [24]

Berkeley economics professor, Barry Eichengreen: “Moreover, the Commission’s €50 billion estimate surely overstates the prospective receipts. If France imposes the tax unilaterally, trading in equities and derivatives will simply migrate to Frankfurt. If it is limited to the eurozone, transactions will move to London. And if it is adopted by all EU member states – a fanciful scenario, given British resistance – the market will simply migrate to New York and Singapore… If the aim is to augment revenues, a Tobin tax is the wrong tool.” [25]

Professor Eichengreen not only knew James Tobin – the man who first proposed the FTT (aka Tobin tax) – Professor Eichengreen co-wrote several published research papers with the Nobel Prize winner. Regarding James Tobin and the Tobin tax, Professor Eichengreen recently said: “James Tobin was a friend of mine, my mentor, and, for a brief privileged period, coauthor. Tobin would not have been pleased to see his proposal repurposed in this way.” [26]

The World Bank: “Even if the bolt-hole of tax havens to which transactions might migrate is effectively shut-off, neither the revenue nor the efficiency gains hoped-for by big picture tax reformers are likely to materialize.” [27]

Oxera (European economics consultancy): “… the net revenue collected by the proposed FTT is likely to be poor since, in the first scenario, the collection of revenue is ineffective and tax revenue is lost from the relocation of financial services activity, while in the second scenario the large negative impact on GDP significantly affects the collection of other taxes.” [28]

ISN’T THE EUROPEAN UNION GOING TO ADOPT A FINANCIAL TRANSACTION TAX ANYWAY?

FACT:

Introduction of a European Union transactions tax requires unanimous consent among the member nations. [29]

Opposing the tax: the UK, Sweden, Denmark, Malta, Ireland, the Czech Republic, Bulgaria and Romania.

The Netherlands: officially neutral, but their Ministry of Economic Affairs recently published a report calling the financial transactions tax a “slecht idee” (bad idea)[30] and a study by the Dutch Central Bank call the FTT “undesirable.” [31]

Switzerland: not a member of the EU, but opposes the FTT on the grounds that it will harm the greater European economy. “The Federal Council granted a clear rejection of a European financial transaction tax.” (Translated from the German.) [32]

FACT:

The European Union “Impact Assessment” report says the EU FTT would raise as much as €57 billion annually, but would also result in lower GDP.

UK European Scrutiny Committee: “… taking these figures in turn and before taking into account relocation effects, in real economic impacts it can be estimated that a reduction of 1.76% of EU GDP equates to a fall in economic output of €216 (£186) billion, a fall in employment of 0.2% equates to a loss of 478,000 jobs, a 3.43 % fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.” [33]

The Dutch Central Bank: “The negative impact on the economy is a certainty.” [34]

Denmark’s Economy Minister, Margrethe Vestager: “As everybody says (the) priority now is to create jobs. We’re very reluctant to engage in a proposal that would have the opposite effect, minimize growth and provoke major job losses.” [35]

Oxera: “The Commission’s economic impact assessment already finds a significant negative impact, yet Oxera’s review suggests the impact is likely to be even larger than the Commission expects.” [36]

Mario Draghi, President of the European Central Bank (ECB): Told members of the European Parliament’s Economic and Monetary Affairs Committee that the FTT will accelerate the flight of investment capital out of Europe. “We are at a time when most foreign investors and sources of funding have left the much greater part of the euro area – we want them to come back.” [37]

FACT:

Some European countries that have favored the transactions tax in the past are now expressing doubts.

Finland’s Prime Minister, Jyrki Katainen: “From the Finnish point of view, if Sweden is outside, it would have a negative impact for the development of Finland’s financial markets and economy.” [38]

Luxembourg’s Finance Minister, Luc Frieden: “It’s a bad idea because it would have the effect of pushing financial transactions to other countries where such a tax doesn’t exist.” [39]

France appears determined to go it alone on the FTT: “The French are overwhelmingly in favor of this tax — both left and right wing voters — for cultural and historic reasons,” said Stephane Rozes, professor of political sciences at French university HEC Sciences Po. “They want to make their economy more independent from finance, which many now see as an obstacle to development. From an economic point of view it makes no sense.” [40]

AT THE VERY LEAST, WON’T A FINANCIAL TRANSACTIONS TAX CALM DOWN VOLATILE FINANCIAL MARKETS?

The Institute of Development Studies: “Although some theoretical models suggest that FTTs reduce volatility, most empirical evidence shows that higher transaction costs are actually associated with more, rather than less, volatility.” [41]

The International Monetary Fund (IMF): “In general, if an STT [aka, FTT] reduces trading volume, it may decrease liquidity or, equivalently, may increase the price impact of trades, which will tend to heighten price volatility.” [42]

The CPB Netherlands Bureau for Economic Policy Analysis: “We find little evidence that the FTT will be effective in correcting market failures… The empirical evidence does not suggest that the introduction of an FTT reduces volatility or asset price bubbles.” [43]

THE BOTTOM LINE

The International Monetary Fund, The World Bank, Oxera, The Center for Policy Studies, The Dutch Central Bank, The European Central Bank, The European Federation for Retirement Provision, EFAMA, CPB Netherlands Bureau for Economic Policy Analysis, university professors from Berkeley, Harvard, MIT, Lund University (Sweden), HEC-Sciences Po (France) and many others oppose transactions taxes because:

Transaction tax revenues would be much less than projected and those taxes that are collected would be disproportionally paid by pensions, retirement savings, annuities, charitable trusts, low-risk money market funds, non-financial businesses and working men and women rather than the banks for whom the FTT is intended.

Transaction taxes would not stabilize financial markets.

Transaction taxes would have a negative impact on the economy by decreasing GDP and increasing unemployment.

Banks and bankers should be held financially responsible by taxing and regulating them directly, not by imposing a broad transactions tax that would fall heavily on “innocent bystanders.”

——————————————————————————–

[1] Matti Leppälä, “Financial transaction tax will hit innocent bystanders,” Public Service Europe, February 15, 2012.

[2] Maude van Gaal, “EU Tansactions Tax is ‘Undesireable’ Dutch banks says,” Bloomberg News, February 6, 2012.

[3] Lars Oxelheim, PhD, “FTT will hit workers’ pension savings,” Financial Times, December 1, 2011.

[4] Sophie Baker, “Dutch fund warns FTT would cost billions,” eFinancial News, November 14, 2011.

[5] Andreas Gaua, “What would be the effect of the proposed transaction tax on Life Insurance guarantees?” Computer Aided Finance, February 14, 2012.

[6] Maud van Gaal, “EU Tansactions Tax is ‘Undesireable’ Dutch banks says,” Bloomberg News, February 6, 2012.

[7] Steve Johnson, “Tobin Tax costs would fall on investors,” Financial Times, December 18, 2011.

[8] ibid.

[9] Steve Johnson, “FTT would have cost €38bn, says Efama,” Financial Times, February 26, 2012.

[10] Center for Policy Studies, Time to bin the Tobin Tax, April 2012.

[11] Kenneth Rogoff, PhD, “The Wrong Tax for Europe,” Project Syndicate, October 3, 2011.