Financial Transaction Tax: Sand in the Wheels?

Marc To Market's picture

The European Commission formally endorsed the financial transaction tax agreed to by eleven of the 27 members.  The tax will be set at 0.1% for stocks and bonds and 0.01% for derivatives.  The tax will go into effect at the start of 2014, by which time the participating countries will give it formal approval.

There seems to be two purposes of the tax.  The first is to raise revenue.  The EC projects the tax will raise 30-35 bln euros annually where ever and whenever an instrument from eleven is traded.  This would seem to block the ability to avoid the tax by moving transactions out of the eleven countries.  It reinforces the "residence principle".  This essentially means that if some one is a resident of the eleven countries, or acting on behalf of a resident, the transaction will be taxed anywhere it takes place.

The other purpose is to deter the high frequency trading, which some officials see as largely unnecessary and potentially destabilizing.  Although Keynes advocated a financial transaction tax in 1936, the American economist James Tobin is often blamed credited with the idea.  He argued that wheel of capitalism turn too efficiently.  A small tax specifically on foreign exchange transactions, he argued, would help stabilize the foreign exchange market immediately after the collapse of Bretton Woods. The EC estimates that the tax could lead to a 15% drop in equity trading and a 75% drop in derivative trading. 

Although the UK will not participate in the FTT, the UK has long tax financial transactions.  The stamp tax goes back to late 17th century and reports suggest this is the oldest tax still in existence in the UK. 

There are some exemptions that are noteworthy.  Day-to-day transactions by individuals and non-financial firms will not be taxed.  Primary offerings of stocks and bonds will not be taxed; nor will transactions with official entities, such as central banks and the ESM.    It does appear that repurchase agreements will be covered by the new tax, though apparently in a different way that transactions with outright buyers and sellers. The EC estimates that 85% of the transactions covered by the tax are between financial firms.

The eleven countries that have expressed interest include:  Germany, France, Italy, Spain, Belgium, Austria, Greece, Portugal, Estonia, Slovenia, and Slovakia.   The one country that is notably absent is the Netherlands.  It typically favors greater integration and harmonization.  Its finance minister (Dijsselbloem) is now the head of the Eurogroup (of euro area finance ministers) and would also want to participate. 

The sticking point for the Dutch is that pension funds come under the purview of the new financial transaction tax.  EU officials counter that the tax could make pension funds safer by encouraging them to buy bonds in the primary market and hold until maturity.  

The US has indicated it will study the proposal, but unofficially does not support the European FTT on grounds that it would harm US investors who bought the securities that will be taxed.  The US itself has a small financial transaction tax on equities.  The tax (Section 31 fee) is used to support the SEC.  It is set at 0.0034% and typically raises some multiple of the SEC's budget.  From 1941-1966, there was a federal tax on stock sales of 0.1% at issuance and 0.4% on transfers.

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Archduke's picture


For all our suspicions of Monsignors Monti & Draghi, the Italian tax seems pretty spot-on.

it foces some skin in the game for OTC trades, is douby punitive Cancels and Amends,


The tax rate for equity transactions under the Italian law will be set at 0.12% for 2013 before decreasing to 0.1% from 2014. Over-the-counter equity transactions will be taxed at 0.22% in 2013, decreasing to 0.2% in 2014 The tax will be applicable from March 1. Equity derivatives transactions will also be subject to various fixed charges, with taxes on these instruments becoming applicable from July 1.

High-frequency trading also comes under fire from the new Italian law. Order amendments and cancellations will be taxed when they take place within 500 milliseconds, although the final time interval has yet to be finalized by the Italian parliament. Again, the start date for this will be March 1 for equities and July 1 for derivatives.



pashley1411's picture

Because when you are a hammer, everything is a nail.

Its not that the financial world doesn't need collaring and defanging.  

But the politicians would leave the details to the financial lobbyists to work around, either by jurisdiction, or by transaction.

Just so long as the political class kept their swanky Brussels address and mistresses in diamonds, who really cares. 

Conax's picture

Be too late by 2014. The boil is coming to a head sooner than that.

SmittyinLA's picture

Bid/offers will not be taxed, ITS NOT A MASTURBATION TAX 

Besides the jerk-offs will be exempt, they wont "locate" in "the eleven" (although their software will reside, operate and earn income in the eleven).

Stuck on Zero's picture

Is the tax on bids/offers or only on completed transactions?  Sounds like the algos can still flood the markets with bids and offers.


Atlantis Consigliore's picture

Put a Flippin Meter in every bank CDS, Forex, Prop Trading and OTC  spot, futures and stock/options trading room.

.01 penney every trade,  bleed da Banks dry. 

Boris Alatovkrap's picture

No, no, no, tax is not for prop desk, is for retail investor, like VAT is for retail buyer. Why is tax master of commerce when many is slave to be tax!? Wise up to true order of world - maybe you survive.

Doubleguns's picture

I keep thinking about the old story line that If you want less of something tax it. So now we will see even less trading on the markets and watch them......

Manthong's picture

There should be a penny a quote tax.

Panafrican Funktron Robot's picture

Low volume = finance industry shrinks, so bring it the fuck on.  

Boris Alatovkrap's picture

"Idiot is fail to learn history is repeat" - Lord Acton


Now Boris is owe penny, but to who is owe?

disabledvet's picture

It will also mean if you make the claim "no transaction was made" on some "off market device or item" (cough, cough CDS cough cough) that if found to have engaged in a process whereby money changed hands for the purpose of gain (profit) then you will be liable to pay a tax...or if failing disclose (who would want to do that?) "liable for back taxes" plus interest.

Boris Alatovkrap's picture

Boris is propose tax on government bloviating. Every time, politician is to open mouth, charge 1% surtax on politician salary, 10% of campaign contribution. Purpose is two, first is incentive to STFU, second is to offset global warming.


(See what Boris is did!? Double entendre for politician blow hot air to give anthropogenic global warming influence.)