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EU Considers a Financial Transaction Tax
Posted on November 15th, 2016 in Uncategorized

The EU Puts Banks and Traders in its Crosshairs with a Financial Transaction Tax.

Euro Dollars PicMany believe that the EU taxing authorities have never met a tax they did not like. We have seen that opinion proven true with the Luxembourg papers and the recent Apple rulings just to name a few.  But now the EU proves it again with a push to institute a Financial Transaction Tax.

A group of 11 EU countries championing the Financial Transaction Tax, (sometimes referred to as the Tobin Tax) met in October to start drafting a version of the tax to be submitted by the end of 2016. Various EU countries have been trying to convince other EU countries to implement the tax since early 2011.

Most US readers are not familiar with this tax. This idea was originally presented by the economist James Tobin in a lecture at Princeton in 1971.  The idea is to place a small tax on value of the stock trades and other similar financial transactions irrespective of any profit or loss.  The reason for the tax is that politicians and other sectors of the public believe that the banks are making inflated returns and that those extraordinary profits are at the expense of others and should be taxed, (the Robin Hood Tax theory).

Proponents state that:

1. The tax would discourage speculative trading and slow or stop the high-speed trading phenomenon thus reducing market volatility.

2. The tax would provide revenue to the government.

3. The tax is a way to make the banks, that they believe caused the 2007 financial crisis, pay something back (bashing the bankers).

Detractors ague that:

1. The tax will increase the cost to invest in the financial markets and reduce the number of trades.

2. That market volatility could rise because thinly traded markets have a greater tendency to have extreme economic spikes up and down due to a lack of liquidity.

3. While governments try to engineer taxes to only effect a specific sector or group, inevitably higher costs always seem to find their way to the individual tax payer in the form of higher prices and increased government red tape.  Therefore, it seems that if this tax ever becomes a reality in the US the result would be a tax that every investing citizen will have the “privilege” of paying.

4. Higher fees and taxes are bad for individual investors trying to save enough to make ends meet in their later years. We have talked about retirement accounts and the need to save on a regular basis.  We have also covered the fact that higher investment account maintenance fees and taxes can have a material effect on an investment accounts long term returns.  The department of labor’s own website discusses how an increase in a retirement account management fees from .5% to 1.5% can cause a 28% decrease in the expected return on your investment over a 35-year period.  So, the tax would have the effect of stunting the growth of people’s retirement account.

Germany and France have been strong supporters of this tax going back to 2010 and the Obama administration announced its support of the tax at a G20 summit in late 2011. The goal is to have many of the modern countries implement this tax in order to stop investors from moving their money to other countries and avoid the tax all together.

Currently the UK, France, Italy, Brazil and South Africa have a similar tax that brings in billions of dollars a year. France recently passed an amendment to increase their financial transactions tax from .2% to .5% to cover expected budget short falls.  China is currently drafting legislation to implement a similar tax for foreign currency trades.  If implemented in the US, it is estimated that a transaction tax would bring in well over 150 billion dollars.

Sweden tried a similar tax between 1984 and 1991 and abolished the tax because it hurt their exchange’s competitiveness as banks and investors simply moved their trading to other exchanges. Similarly, Italy has considered suspending the tax as part of a stimulus package.  With the incoming Trump administration’s anti-tax position, it is doubtful that a transaction tax will come to the U.S. any time soon but if the EU does implement a transaction tax the US could gain from a flood of money looking for a friendly home outside of the EU.

About the Author – Phillip Zagotti, CPA is the President of Zagotti and Burdette CPA, LLC. He can be reached at pzagotti@znbcpa.com or (832) 800-3347. 

 

 


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