Now is the Time for a Financial Transaction Tax: European Progress and Prospects for the United States
Europe’s FTT came to Washington this week in the form of a presentation at The Center for American Progress. Dubbed “Now is the Time for a Financial Transaction Tax: European Progress and Prospects for the United States,” the featured speaker was Lithuanian economist Algirdas Semeta, European Commissioner for Taxation and Customs and a leading voice of the FTT.
Semeta came to the U.S., in part, to try and quell the irrational fears expressed in both the U.S. and UK about such a tax, and to encourage implementation of their own. “The financial sector is under-taxed,” said Semeta. “This FTT redresses that imbalance.”
“Every government needs new sources of public funding, but no one wants to increase pressure for this funding on ordinary citizens and small businesses,” Semeta added. An FTT not only solves the problem of new revenue, he explained, but does so in a way that holds the financial sector accountable for their role in our global economic crisis.
Earlier this year, under a process dubbed “enhanced cooperation,” an FTT was set to be implemented amongst 11 Member States (France, Germany, Belgium, Austria, Slovenia, Portugal, Greece, Slovakia, Italy, Spain, Estonia). It mirrors the scope and objectives of the original FTT proposal put forward in September 2011--- taxing all transactions at the rates of 0.1% for shares and bonds and 0.01% for derivatives.
For years Semeta has been advocating for a European Union-wide FTT as a way to discourage unproductive financial activity – or as Semeta himself describes it, “[to reduce] the thousands of financial transactions made per minute that have no social relevance.” Semeta is referring to the enormous number of trades conducted by the millisecond via complex computerized algorithms. These high-frequency trades are associated with “flash crashes” that cause market prices to plummet spontaneously and sometimes drastically. By levying a fee on trades – and thus making high frequency trading less profitable – an FTT would help to reduce such risky behavior.
Lynn A. Stout, Professor of Corporate and Business Law at Cornell University, joined Commissioner Semeta at Monday’s event. “The financial sector has two halves: the useful half and the useless half,” she explained. “The useful sector actually injects money into projects while the useless sector just [makes these high frequency trades]. . . A modest FTT will discourage wasteful trading because those who benefit from high frequency trades aren’t actual investors, but the middlemen – Wall Street.”
Opponents of an FTT claim such a tax would slow trading to such an extent that it would harm economic recovery, but the panelists disregarded this notion. “In fact,” said Stout, “by encouraging investors to hold investments for the longer term, I think there’s an argument that can be made that an FTT would increase economic growth.”
Stout called upon fellow academics to better scrutinize critiques of FTT. “Just because an academic’s name is on a study doesn’t make it an academic piece. We can’t trust the literature on FTTs because so many of these studies are being paid for by Wall Street. I say: let’s look at the history. And history doesn’t show any adverse effects of an FTT.”
“The argument that an FTT will negatively impact economic growth is false,” said Semeta. “It’s true that the introduction of this tax will have a slight impact on growth, but if the revenue is invested in smart ways, the net impact will be positive overall.”
But Semeta’s met stiff opposition from the forces of finance. The Obama Administration, the U.S. Chamber of Commerce and financial trade groups up and down Wall Street are standing firm against any FTT—here in the U.S. or abroad. Outgoing Treasury Secretary Timothy Geithner and Obama’s economic policy advisor from 2009-2010 Larry Summers – both key architects of the too-big-to-fail bailout for Wall Street - have dismissed the FTT plan.Semeta indicated that the U.S. Chamber of Commerce, whose representatives he met in D.C. this week, were “quite negative” about the FTT.
In a statement released on Monday, incoming Treasury Secretary Jack Lew joined the chorus of opposition to a Wall Street sales tax. "The administration has consistently opposed a financial transaction tax on the grounds that it would be vulnerable to evasion, create incentives for financial reengineering and burden retail investors," Lew said.
Semeta and others, including U.S. Robin Hood Tax Campaign supporters, have crafted their legislative initiatives to address some of the criticisms raised by Lew and others. For example, the Ellison bill, to be reintroduced in Congress next month, has brokers paying the tax, not retail investors.
And evasion becomes harder, say FTT supporters, as the tax is embraced in more and more places. For Semeta, his “number one solution” is to have a global FTT, the “number two best solution” would be for all the major financial centers to have one, he said.
The Ellison bill, which embodies the Robin Hood tax principles, includes a goal of some new revenue to combat international climate change. This is a priority for Semeta and his European supporters, as well.