With interest in a financial transactions tax (FTT) growing in many parts of the world, it seems like a reasonable time to look at some of the research that’s been done on the impact of these taxes. Is it a reasonable way for governments to raise revenue and curb some of the high-frequency trading and speculation that can destabilize the financial systems? Or would such a tax make the financial markets less efficient and liquid, ultimately boosting volatility and cutting into investment returns for even small investors? Arguments have been made on both sides.
An FTT is a tax on the exchange of financial instruments, such as securities, bonds, shares and derivatives. It typically doesn’t apply to consumer products.
In August, France implemented an FTT of 0.1 percent of the value of the equity securities in a transaction, including shares of stock, warrants and preferential subscription rights, as this summary by the French law firm of CMS Bureau Francis Lefebvre outlines. Australia, Hong Kong and South Korea also have in place some form of an FTT, according to this presentation by the Chicago Political Economy Group, a research group focused on economic and social justice.
Last fall, Senator Tom Harkin (D-Iowa) and Congressman Peter DeFazio (D-OR) introduced legislation in the U.S. to impose a tax of three basis points on most non-consumer financial trading, including stocks and bonds, other than at their initial issuance. The measure remains with the Senate Committee on Finance. According to a number of reports, however, the White House doesn’t support the idea of a financial transaction tax.
Studies on the impact of other FTTs already in place around the world, as well as the potential impact of an FTT implemented in the U.S., have shown mixed results.
On the positive side – at least, if you’re Uncle Sam and trying to reduce the deficit – the tax brings in cash. An analysis of the Harkin and DeFazio bill from the Joint Committee on Taxation calculated that it would raise $352 billion between January 2013 through 2021.
On the other hand, a 2012 study of the impact of an FTT by researchers at the Netherlands Bureau for Economic Policy Analysis, “Financial transaction tax: review and assessment,” found “little evidence for the corrective properties of the FTT.” Such a tax wouldn’t reduce market volatility, and its impact on asset price bubbles is unclear, the paper stated.
Another 2012 study, this one by Oliver Wyman, reached similar conclusions. An FTT would dramatically increase the cost of transactions, particularly the most liquid and most frequently traded products, while having little impact on speculative trading, which could more easily move outside the reach of the tax. In addition, “implementation of the tax costs the economy more than the tax burden,” according to the report, “Proposed EU Commission Financial Transaction Tax Impact Analysis on Foreign Exchange Markets.”
However, the Chicago Political Economy Group points out that a number of countries, including Hong Kong, South Korea and the U.K., have lived with an FTT for years, with little apparent negative impact on the local financial industry. All boast large financial markets.
A 2011 study by the Institute of Development Studies, a UK-based development research organization, found that FTTs haven’t been as harmful as their opponents sometimes claim, nor as beneficial as their supporters sometimes suggest.
“Although the evidence is not conclusive on all points,” the IDS study noted, “an FTT is clearly implementable and could make a significant contribution to revenue in the major financial economies. It would be unlikely to stabilize financial markets but, appropriately designed, also unlikely to destabilize them….The incidence of a Tobin tax (that is, a small tax on FX transactions) would be less progressive than some of its proponents claim, but it would be unlikely to be significantly worse than most alternatives.”