Europe's Going To Get Around To Taxing One Or Two Financial Transactions Any Year Now

Author:
Updated:
Original:

If you were designing a new tax regime from scratch, I'm sure it would be great. Because you're brilliant, of course, but also because, and this is going to sound a bit harsh but isn't meant that way, your phone isn't exactly ringing off the hook with powerful people calling to ask for special favors in this tax regime that you are hypothetically designing. Hypothetically. Which is to say you're not the EU, which you're probably pretty pleased about:

European countries plan to scale back a proposed financial transactions tax drastically, initially imposing a tiny charge on share deals only and taking much longer than originally intended to achieve a full roll-out. ...

Italy and France have expressed concerns about widening the tax beyond shares to government debt as both believe it could discourage investors from buying their bonds.

It's hard not to enjoy the story of the European financial transactions tax at least a little bit; the EU is basically growing a brand-new tax in a petri dish, and the result of the experiment might inform how you think about the prospects for other potential experiments in taxation. (I mean, at least in Europe.) In that sense it's a counterpoint to Apple's travails before Congress last week. Sure, the current web of international corporate taxation has been polished to its current state of extreme perfection by decades of special-interest lobbying and application of highly paid human ingenuity to discovering and building ways to avoid taxation. But modern technology has progressed to the point that you could replicate that whole structure in a few months if you put your mind to it, and Europe did:

Some states, including Austria and Belgium, argued last week for an exemption for pension funds, while others asked whether forms of private investment such as personal savings should also be excluded.

Etc. etc. etc.; both the Journal and Reuters have good articles today that are mostly litanies of "ooh here's another objection that was solved by jettisoning a bit of the FTT." The trick of course is to create a patchwork of excluded instruments, excluded transactions, excluded issuers, excluded sellers, and excluded buyers so that nobody actually pays the tax. Or at least so that it's a Helmsley tax where anyone with sufficient gumption/cash can get around it. One way to do that is to tax only cash equities and exclude derivatives -

Rather than levying [the tax on] trades in stocks, bonds and some derivatives from 2014, it may now apply to shares only next year and to bonds up to two years later. Derivatives may be covered after that, or the roll-out could be halted altogether if problems arise, such as if traders move their deals en masse elsewhere to avoid the charge.

- while fostering a robust market in synthetic prime brokerage and contracts for difference. "Europe: all our trades are derivatives trades."1

The special pleading is weirdly noteworthy for its one-sidedness, even for financial-industry special pleading. In most financial regulatory regimes someone is like "we need to regulate X more because it's horrible" and someone else is like "well but if we reduce X there'll be no small business lending," because "small business lending" is basically financial lobbying's single move to the hoop.2Here too:

"There are questions about financing the economy, and particularly around small and mid-sized companies," one EU official said. "Would it make it more difficult for SMEs to find money?"

But while the FTT might be an appealing way to implement other regulatory goals - cracking down on some bad X's by taxing them - but for the most part no one seems all that jazzed about that, instead viewing the FTT boringly as a simple revenue-generating measure. So for instance:

Countries are also divided over the treatment of repurchasing agreements, a form of short-term borrowing for dealers in government securities. The International Capital Market Association, a lobby group, has warned that the FTT would cause the short-term repo market in Europe to contract by at least two-thirds, with serious negative consequences for other financial markets and the real economy.

"Real economy" of course means "small business lending," but coincidentally here is the Wall Street Journal today worrying about the possibly destabilizing repo market - "In other words, the repo market wasn’t just a part of the meltdown. It was the meltdown." Perhaps taxing it would be a good idea? Like, maybe if an FTT on repo made more banks do more of their borrowing in one or three or twelve-month terms, instead of overnight, that might make the banks safer?

Or not, I dunno. But one occasionally expressed goal of an FTT is to reduce possibly-destabilizing high frequency trading by adding friction to share trading, which I guess is a reason to roll it out first in equities, which unlike bonds tend to be traded high-frequently. You could imagine extending that reasoning to other transaction types that tend to worry people. Instead it's been mostly the opposite.

Europe plans major scaling back of financial trading tax [Reuters]
EU Likely to Weaken Proposed Transaction Tax [WSJ]

1.I mean. Not really. Someone pays the UK's 0.5% stamp duty on stocks, or at least some of them. And as far as I can tell, like, equity swap volume in Europe is ~150% what it is in the U.S., maybe some of that attributable to different taxing regimes.

2.Or, like, small business equity raising, which honestly is an even weirder move.

Related