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Study: Financial Tax Would Pay Off Big

03/10/2015 02:23 pm ET | Updated May 10, 2015

Elected leaders in Washington are heading into another season of wrangling over the same old federal budget revenue shortfalls. But a number of European countries are looking forward to a revenue injection from a fresh and deserving source: high flyers in the financial markets.

Eleven EU governments are now working out the final details of a plan for a regional financial transactions tax, with a January 2016 deadline for implementation.

Applying a small tax to each trade of stocks and derivatives would discourage short-term, purely speculative trading while generating significant revenue. And according to a just-released study, those revenues are likely to run even higher than originally projected.

The German Social Democratic Party commissioned the study from the prestigious German Institute for Economic Research, more commonly known by its acronym, DIW. The results are eye-popping.

Germany alone can expect anywhere from 18 to nearly 45 billion euros per year from a serious regional financial transactions tax, depending on how the tax affects trading levels, according to DIW. That translates into a potential benefit of about $US48 billion in an economy one-fifth the size of the United States.

The Joint Committee on Taxation of the U.S. Congress has produced a revenue score for only one of several financial transactions tax bills pending before Congress, coming up with a far lower number: $350 billion over 10 years.

The major difference lies in the tax design. DIW estimates are based on the European Commission's proposed rates of 0.1 percent on stock and bond trades and 0.01 percent on derivatives. The Joint Committee on Taxation estimate is based on a tax of 0.03 percent on trades of those same instruments.

The DIW also assumed that the 11 governments would adopt the European Commission's double-barreled anti-avoidance mechanism. Traders would have to pay the tax if they or the other party to a transaction reside in one of the 11 participating EU member states and also if the instrument they're trading was issued in one of those countries, even if it is traded elsewhere.

DIW analyzed three of the other larger participating countries and came up with revenue estimates of 14 to 36 billion euros for France, 3 to 6 billion for Italy, and 700 million to 1.5 billion for Austria.

For these four European countries combined, the total potential revenue estimate comes to considerably more than a previous European Commission projection of up to 31 billion euros for all 11 participating governments.

These impressive revenue numbers could shrivel, of course, if the European governments cave in to pressure from the financial industry. After several years of trying to kill the initiative altogether, European financial institutions have had to accept the inevitability of a financial transaction tax. Their focus now: pushing for exemptions that would render a new financial transactions tax virtually meaningless.

In particular, the big banks would like to exclude from the tax all trades in derivatives, the potentially highly lucrative financial instruments that played a major role in the 2008 financial crisis.

The DIW study is powerful ammunition for those on the other side pushing for a broad-based tax. If derivatives are exempted, DIW notes, "most of the potential revenue from FTT is lost." Germany and France would lose about 90 percent of the expected revenues.

It's not just that derivatives make up a large share of financial market activity. Traders would respond to the exemption by shifting into derivatives to circumvent the tax.

The new DIW study also comes at a key moment in the U.S. debate. The House Democratic Leadership recently announced support for a financial transaction tax, and these House leaders are right now in the process of developing the details of their proposal.

It's a shame that the United States still stands so far behind Europe in embracing a financial transaction tax, a policy that would do so much to make our economy more equitable and stable. On the positive side, the Europeans have generated valuable analysis that helps make the case for significantly taxing Wall Street speculation.