The leaders of France and Germany may have their differences on the big question of the day — stimulus versus austerity. But they do agree on one thing — taxing financial transactions.
Former French President Nicolas Sarkozy was hot on the idea of a small tax on each trade of stocks, derivatives, and other financial instruments. But his successor, François Hollande, is even hotter.
He and German Chancellor Angela Merkel are working together to build a coalition of the willing behind the tax, conceding that some EU governments, notably the UK, won’t be joining. On June 22, they announced that 10 countries are ready to move forward. The model they’re considering is a European Commission proposal to tax trades of stocks and bonds at 0.1% and derivatives at 0.01%.
To support this push, 52 U.S. and European financial professionals have broken rank with their industry peers and come out in support of the tax. In a letter to G20 and European leaders they emphasized the benefits from a business perspective. “These taxes will rebalance financial markets away from a short-term trading mentality that has contributed to instability in our financial markets,” they wrote.
In a press conference, Wallace Turbeville, a former Vice President at Goldman Sachs, said it was remarkable that so many people from the financial world signed the letter since the activity the tax would hit hardest the computer-driven high frequency trading, which is tremendously profitable. “For folks to come forward like this, they have to know they’re touching a nerve in the industry and their friends and colleagues have a vested interest in it,” he said.
Turbeville, currently a fellow at the think tank Demos, also serves on a Commodity Futures Trading Commission advisory committee that is addressing concerns about speed trading. He noted that “it’s a real challenge to monitor and track this trading from a technical standpoint. A solution like this tax could be very helpful. It’s a great deal for the public.”
Leo Hindery, Jr., a managing partner of the private equity fund InterMedia Partners, chimed in to say that “No one should look at this tax as punitive to Wall Street, but rather proactive and positive to allay volatility and to thoughtfully raise revenue from sources other than the middle class or even the upper-middle class.” The European Commission proposal is estimated to generate 57 billion euros (US$72 billion) per year. In the United States, revenue estimates for various tax models range from $35 billion to hundreds of billions per year.
With momentum building behind a European financial transaction tax, opponents in the industry are also redoubling their efforts. Germany’s Union Investment went so far as to threaten to stop launching mutual funds for German small investors if the proposal is adopted. The asset manager said the tax was a “spectacular violation against the equal treatment of small savers.”
Professor Lynn A. Stout of Cornell Law School has a different take. “If we impose a financial transaction tax, it would actually help shareholders make money,” she argued. “They may pay a transaction tax, but it will encourage longer holding periods for stock, which is going to allow companies to make longer term plans and investments and that could increase returns to shareholders.”
Stout, who also signed the support letter, responded to the common argument that high frequency trading provides beneficial liquidity to the system. “As the director of a mutual fund, I actually think we need to recognize that liquidity may be socially damaging if we have too much of it.” She pointed out that in the 1940s and 1950s, the U.S. had a small financial transaction tax and fixed brokerage commissions that amounted to one-eighth of one dollar on every share of stock traded. Since both of those were eliminated, transaction costs have plummeted and average holding periods for shares of corporate equity have shortened from eight years to about four months, Stout said.
The financial industry supporters of transaction taxes are not quite as well funded or organized as the goliaths on the other side. But as Merkel and Hollande ramp up their campaign, these advocates may take a bit of the sting out of the inevitable backlash.