Two US lawmakers have introduced legislation to impose a financial transaction tax (FTT) on certain trading activities undertaken by banks and investment houses, raising the possibility of coordination between the US and Europe on the issue.
Democratic congressman Peter DeFazio of Oregon and Democratic senator Tom Harkin of Iowa, introduced a bill in both houses yesterday which would place a blanket tax of three basis points (0.03%) on most non-consumer financial trading, including stocks, bonds and other fixed-income instruments, except for their initial issuance.
Senator Harkin said the tax would cover all derivative contracts, options, puts, forward contracts, swaps and other complex instruments at their actual cost, but the measure would exclude debt that has an original term of less than 100 days.
“The first step on the long path to recovery happens when we rein in the excessive speculative activity that has destabilised our financial system,” said DeFazio. “This legislation will curb unnecessary speculation and generate needed revenue to help our cash-strapped federal government pay down debt and invest in the real economy to benefit all Americans.”
By setting the tax rate “very low”, Harkin insisted the measure was not likely to “impact the decision to engage in productive economic activity”, but admitted the tax was aimed at reducing speculative activities like high-speed computer arbitrage trading.
“A transaction tax could help to shift Wall Street away from short-term trading,” he said. “There is no question that Wall Street can easily bear this modest tax.”
The proposed tax would take effect on 1 January 2013. However, the Republican Party has a majority in the House of Representatives and traditionally has been opposed to a financial transaction tax.
US Democratic President Barack Obama has not yet publicly endorsed the bill, but the US delegation to this weekend’s Group of 20 summit, held in Cannes under France’s presidency, will discuss prospects for the coordinated introduction of a financial transaction tax with the leaders of other major economies.
A similar bill introduced by Democratic congressman Chaka Fattah that would have levied a 1% tax on all money transactions failed to progress. The present legislation is co-sponsored by 13 fellow Democrats, but no Republicans have crossed the floor.
In September, the European Commission proposed a Europe-wide tax to be levied on all transactions of financial instruments between financial institutions when at least one party was located in the European Union. The exchange of shares and bonds would be taxed at a rate of ten basis points (0.1%) and derivative contracts at a rate of one basis point (0.01%).
Ahead of the G-20 meeting, UK Chancellor of the Exchequer George Osborne said in a private letter to banks that “the necessary international consensus does not exist” for a transaction tax. But French president Nicolas Sarkozy has stated that “France considers that a tax on financial transactions is the most promising instrument” for stimulating economic growth.
According to financial research consultancy TABB Group, the planned US tax would have raised US$17.6 billion from cash equities alone in 2010. Based on value-traded figures for last year, the firm asserts that mutual funds and other asset management investors could end up paying approximately US$1.9 billion extra annually. “In other words, explicit transaction fees would jump 22%,” noted Adam Sussman, director of research, TABB Group.