European Breakthroughs on Financial Transaction Tax

NEW YORK, NY - NOVEMBER 23:  People walk outside of the New York Stock Exchange (NYSE) during morning trading on November 23,
NEW YORK, NY - NOVEMBER 23: People walk outside of the New York Stock Exchange (NYSE) during morning trading on November 23, 2015 in New York City. Following a week of strong gains on Wall Street, markets were down in morning trading. (Photo by Spencer Platt/Getty Images)

Ten European governments have made major progress towards the creation of the world's first regional tax on financial transactions. This is exciting news for the growing campaigns around the world, including in the United States, to promote such taxes as a means of curbing short-term speculation and generating much-needed revenue.

On December 8, finance ministers of Germany, France, and eight other eurozone countries released a one-page agreement outlining the current consensus on "core issues." While important details remain, including decisions on tax rates and use of revenue, the negotiators appear to have stood up to fierce industry opposition in several key areas.

A year ago, France, on behalf of that country's financial industry, was pushing to water down the tax in two ways - by completely exempting derivatives trades and by applying the tax only to the net value of securities transactions at the end of the trading day. These loopholes would've substantially reduced the revenue and regulatory benefits of the tax.

Fortunately, the bankers lost on both counts. The 10 governments have agreed to levy the tax on derivatives and all shares transactions, including intra-day trading.

The Wall Street lobby and their European counterparts also appear to have lost a major battle over the scope of the tax. According to the statement, they have accepted two European Commission-proposed anti-avoidance mechanisms - one based on residence (a transaction will be taxable if at least one of the parties resides in a participating EU member state) and another based on issuance (a transaction will be taxable if the instrument is issued in one of those countries). The tax will also apply to both buyers and sellers, and so some U.S. investors will be hit. For example, a U.S.-based hedge fund will be taxed on trades with a German firm.

Former EU Tax Commissioner Algirdas Šemeta has explained that with these mechanisms, "the only way to avoid it would be to give up all financial trading with those in the FTT-zone - a highly irrational response to a small tax, especially given the fact that the participating countries constitute two-thirds of the EU economy."

The German campaign pushing for the tax welcomed what they called an "agreement in principle," while pointing out a few areas of weakness, including the lack of a joint commitment to allocate revenue to climate, development, and social programs. They also cautioned that an exemption for "market-making" activities aimed at avoiding negative impacts on liquidity could "open the floodgates to abuse" if not defined narrowly.

At the same time, German business and finance industry associations signaled the importance of the new agreements by firing off a blistering joint statement calling on governments to abandon the plan altogether. For his part, Britain's finance minister George Osborne threatened to challenge the tax in the European court. David Hillman, spokesperson for the UK's Robin Hood Tax campaign, countered that Osborne "has his priorities in a twist" and is protecting his friends in the financial industry "against the wider interests of Britain."

Not everyone in the financial industry opposes the tax, however. The coalition Americans for Financial Reform issued a statement with quotes from several financial experts who support the tax, primarily because of the benefits for market stability.

Avinash Persaud, a former senior executive at several banks, including UBS and State Street, and currently a non-executive Chairman of Elara Capital PLC, said that "getting so many countries to agree to an international financial tax is no mean accomplishment. This illustrates the importance of reducing the systemic risk caused by excessive churning of portfolios and ensuring the financial sector contributes to the costs of financial crises."

Former JPMorgan Chase senior executives John Fullerton and Douglas Cliggott are also quoted in the release.

These European breakthroughs should boost momentum behind the push for a U.S. tax on financial speculation. Senator Bernie Sanders has already done a great deal to elevate the issue, plugging it in the presidential debates and making it a central part of his Wall Street reform plan. He and Rep. Keith Ellison have introduced the Inclusive Prosperity Act (H.R. 1464/S. 1371), which proposes tax rates of 0.5% on stock, 0.1% on bond, and 0.005% on derivative trades. Sanders has also introduced S. 1373, which includes the tax as the revenue source for a free public higher education program.

Presidential candidate Martin O'Malley also supports a financial transaction tax, while Hillary Clinton has not yet taken a position.

At such low rates, this type of tax targets the high rollers in the financial casino, especially those engaged in the algorithm-based high frequency trading that has no connection to the real economy. According to a just-released analysis by the Center for Economic and Policy Research, ordinary American investors could even enjoy lower annual trading costs if a financial transaction tax results in lower portfolio turnover rates.

While the EU negotiators say they may not reach a final deal until mid-2016, they have overcome some significant hurdles and the finish line is in sight. Now it's time for U.S. policymakers to also stand up to the Wall Street bullies.