The Financial Transactions Tax: Seven Frequently Asked Questions

Wall Street sign with the American flag draping the columns of the New York Stock Exchange

(Photo: Noel Y. C. / Flickr)

1.  What is a financial transaction tax?

A financial transaction tax (sometimes referred to as a Tobin Tax, Wall Street Tax, or Robin Hood Tax) is a tiny fee — at rates of a fraction of a percent — on trades of financial instruments, such as stocks, bonds, and derivatives. Such taxes are promoted as having the dual benefits of discouraging short-term speculation while generating significant revenue.

 

2. What is the experience with financial transactions taxes to date?

More than 30 countries currently have a financial transactions tax (FTT) on particular asset classes that raise billions of dollars per year. These include many countries with robust and fast-growing financial markets, such as the UK, South Africa, Hong Kong, Singapore, Switzerland, and India. From 1914 to 1966, the United States levied a stock transfer tax, which stood at 0.04% per transaction in 1966.

 

3. What is the current state of the debate?

While the Obama administration is not yet supportive, on January 12, 2015, the Democratic leadership in the U.S. House of Representatives announced support for FTT as a core element of a new tax reform plan. In Europe, 11 governments are moving forward to implement the first regional FTT. In January 2013, they received authorization to form a “coalition of the willing” to implement a coordinated FTT. These countries include: Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia, and Slovakia. The starting point for negotiations was a European Commission proposal for a tax of 0.1% on stock and bond trades and 0.01% on the notional value of derivatives. Trading platforms and clearing houses would collect the taxes and pass on revenue to national tax authorities.

On May 6, 2014, these governments announced a plan to start phasing in the tax starting on January 1, 2016, beginning with transactions of shares and “some derivatives.” At the end of 2014, they missed a scheduled deadline to agree on the tax design, but aim to finalize the plan in early 2015. Some countries, led by Germany, have pushed for a broad-based tax similar to the EC proposal, while the French finance ministry has favored limiting the tax to shares transactions—at least at a first stage. However, after 120 parliamentarians from his own party objected to a watered-down approach, French President Hollande announced in a January 5, 2015 radio interview that he would support a broad FTT (although with rates on some instruments lower than proposed by the EC if necessary to capture sensitive markets).

 

4. How much revenue could be raised?

The European Commission estimates that their original proposal would generate about 31 billion euros ($US 42 billion) per year for the 11 participating countries. Limiting the tax to only share transactions would reduce the potential revenue to roughly 6 billion euros ($US 7.2 billion) a year, according to the French government. In the United States, the Joint Committee on Taxation has produced a score for only one of several FTT bills, concluding that a tax of 0.03% on stock, bond, and derivative trades could raise $350 billion over 10 years.

 

5. Would FTT hurt average investors?

The cost would fall overwhelmingly on short-term speculators. For most pension funds and traditional stock-and-bond-holders, the cost would be negligible—in fact less than typical portfolio management fees. Moreover, to the extent that FTT encourages investment that boosts the economy in the long term, this will benefit retirement funds. The 50% or so of U.S. households that have no investments in financial markets would be completely unaffected.

The European Commission has conducted extensive analysis of the potential benefits and risks of financial transaction taxes. Their responses  to common questions are relevant to debates in other parts of the world — read some of them in the full version of this FAQ [PDF].

 

6. Who supports a financial transactions tax?

Plenty of business leaders, financial industry professionals, politicians, economists, and world leaders support a financial transactions tax. George Soros, Bill Gates, Paul Krugman, Jeffrey Sachs, Joseph Stiglitz, Kofi Annan, Al Gore, and Archbishop Desmond Tutu are among the many who have spoken in favor of FTTs.

For a full list of notable FTT supporters, including statements of support for a FTT, read our full FAQ [PDF].

 

7. What do the polls say?

  • In a January 2013 poll conducted by Hart Research for Americans for Tax Fairness, over 6-in-10 (62%) of respondents approved – and one-third (34%) strongly approved – a “small tax on all stock/bond/market trades.”
  • A December 2012 survey by the Mellman Group for Friends of the Earth found that among American voters, two-thirds favored the FTT, saying yes to “taxes on Wall Street banks that helped create our economic problems.” A majority of poll respondents favored reining in “the casino culture of Wall Street” and “skimming the fat off a sector that can afford to pay.”
  • In November 2012, a Democracy Corps national post-election survey found that two-thirds (66%) favor and almost 4-in-10 (38%) strongly favor instituting “a financial transactions tax and a ‘too big to fail’ fee on the largest banks and financial institutions to discourage risky investments and guard against more bailouts.”
  • An International Trade Union Confederation Global Poll conducted in April and May 2012 also determined that among U.S. respondents, over 6-in-10 (63%) favor “a financial transactions tax – which is a small levy on large transactions of currencies, bonds and shares … The idea behind this levy is that this would be a good way for the banking sector to contribute back to society for their part in the financial crisis.”
  • A Euro-barometer survey shows 82% of German and 72% of French citizens support a European FTT. Across the EU, support was 64%.

 

Download the full FAQ on the financial transactions tax [PDF].

  • Mrs Hayward

    You clearly haven’t read the more detailed analysis of the impact of FTT on household savings:

    http://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/Research-2014/Effects-of-a-financial-transaction-tax-on-european-households-savings.pdf

    “The results of the analysis show that the impact of the FTT on household savings is expected to be large in some Member States. In countries that plan to introduce the tax for example, the impact is in the order of €80 billion (Spain) to €205 billion (Italy), representing a loss of up to 16% of the value of the assets being taxed.”

    Likewise, the pension fund industry (such as the UK’s National Association of Pension Funds) would dispute your assessment of the impact:

    http://www.napf.co.uk/PolicyandResearch/Europe-and-International/Financial-transaction-tax.aspx

    “Two NAPF member pension schemes have estimated the cost of the FTT at around €35 million and €5 million per annum respectively. The NAPF has raised a series of concerns:

    The FTT would increase the cost of investing, and this would feed through into lower pensions.

    The FTT would incentivise lower-risk investments and less use of derivatives.

    The FTT implies that active investment strategies result in lower pensions, which is not the case.

    UK pension schemes would pay the FTT when transacting in securities issued in the 11 participating Member States or when dealing with the UK branch of an institution (such as a bank) with its headquarters in one of the 11.

    It is unclear how the FTT would apply to pension investments in pooled funds (typical for UK pension scheme equity holdings).

    NAPF members advise that an exemption for pension schemes would be of only modest value, as fund managers, brokers etc would not be exempt.”