As the world struggles with economic challenges, governments everywhere are cutting back on services and seeking new forms of revenue. One of the most talked about new ideas for raising revenue is the financial transactions tax (FTT). Debate over a European FTT dominated June’s European Union summit, while in the United States, civil society groups kicked off a major new FTT campaign.
The news headlines left many people with questions like: just what is an FTT? How is it related to a Robin Hood Tax? And how might an FTT work in the United States? Some answers to these and other frequently asked questions are provided here.
What Is a Financial Transactions Tax?
A financial transactions tax is a small tax on financial transactions. One long-standing form of an FTT is the local real estate transfer tax that most Americans pay when buying or selling a house. Most existing and historical FTTs focus on real estate transfers and stock trading and are set at rates of 1.5 percent or less of the sale amount of the financial instrument. Financial instruments include real estate titles, but also stocks, bonds, foreign currency, commodities and derivatives on all of these. Since real estate transfers are already taxed, current proposals for new FTTs focus on financial instruments other than real estate.
Most concrete proposals for an FTT include an FTT on stocks and bonds of 0.5 percent or less of the amount traded and an FTT on foreign currencies and derivatives of 0.1 percent or less of the amount traded. The proposed FTTs on foreign currencies and derivatives are usually lower than those on stocks and bonds because the spreads between asking and selling prices for foreign currencies and derivatives are usually very narrow. In order not to disrupt normal market trading, the FTT on these instruments must be smaller than that on stocks and bonds.
What Are the Potential Benefits of an FTT?
An FTT accomplishes two goals. Most importantly, it raises money. Unlike most taxes, however, it does so in a way that is arguably beneficial to the economy as a whole. While most taxes involve some sacrifice from taxpayers in order to promote the common good, the FTT promotes the common good directly through the “positive externalities” it generates for the economy. Positive externalities are improvements to economic efficiency that result from changes in behavior. A well-designed FTT would discourage speculation and computer-driven high frequency trading in financial instruments. That would reduce market volatility and increase access to capital markets for ordinary borrowers and investors. Even if an FTT raised no money, it would still improve the economy.
What Are the Potential Drawbacks?
For bankers, brokers and high-frequency traders, there are many potential drawbacks to an FTT. Many of them might lose their bonuses and some of them might lose their jobs. Investment banking and financial trading in general would likely become less profitable. Some ultra-luxury industries that depend on huge bankers’ bonuses, like yacht-building, fine watches, auctioneering and exotic travel could also suffer.
How Much Money Would Be Raised by an FTT?
It depends on the rate of the tax and what financial instruments are covered by the tax. In the United Kingdom, the FTT (called “stamp duty”) applies only to trading in stocks and bonds and is set at 0.5 percent of the transaction amount. This tax raises over $5 billion per year, according to data from the UK Institute for Fiscal Studies. Since US stock and bond markets are about ten times the size of the UK’s markets, a similar US tax would raise about $50 billion per year. The US Congressional Joint Committee on Taxation estimates that $43 billion per year would be raised by an FTT on stock trading alone.
Stock and bond trading are only two kinds of financial transactions and, as new forms of financial instruments are created, they are becoming less important. A broad-based FTT that covers stocks, bonds, foreign exchange, commodities and derivatives could be expected to raise at least twice as much as an FTT on stocks and bonds only. The amount raised will depend on the specifics of the tax, but a realistic goal for a US FTT should be to raise at least $100 billion per year.
How Hard Would It Be to Collect Taxes Through an FTT?
The FTT is one of the easiest kinds of taxes to collect because it is collected centrally by large banks instead of taxpayer by taxpayer like most other taxes. According to the Economist magazine, it costs just 3 cents in administrative expenses for every $100 raised through the UK stamp duty, versus $1.42 for the personal income tax and $1.25 for the corporate income tax. “Stamp duty is one of the easiest taxes to administer,” according to the LowTax.net web site based in the British Virgin Islands. Of course, LowTax.net views that as a problem: they think the British government will never give up its FTT because it is too easy to collect.
Wouldn’t Banks Just Move Trading Overseas to Avoid Paying the Tax?
It depends how the tax is set up. A well-designed tax won’t allow trading to be moved overseas, though banks are sure to lobby for a tax that would allow this. The UK has had an FTT on stocks and bonds for over 300 years, but London remains one of the world’s top financial centers. Germany and France are home to major financial centers in Frankfurt and Paris, yet both countries support a Europe-wide FTT. The need for an FTT is one of the few policies that unites German right-wing conservative Chancellor Angela Merkel and French left-wing socialist President Francois Hollande.
The easiest way to make sure that an FTT doesn’t push trading overseas is to pass a law saying that transfers of financial instruments cannot be enforced in US courts unless the FTT has been paid. In other words, no tax, no sale. If a purchaser didn’t make sure that the appropriate FTT was paid, the seller could deny that a transaction took place and effectively take the money and run. Of course, no one ever gets to take the money and run, because the buyer has a strong interest in making sure the tax is paid. A well-designed FTT could actually bring trading back onshore instead of driving it offshore.
What’s the Difference Between an FTT and a Robin Hood Tax?
Robin Hood Taxes are taxes on the rich designed to raise money for the poor. People have proposed Robin Hood Taxes based on air travel, carbon emissions and (most recently) financial transactions. The idea of configuring an FTT as a Robin Hood Tax has gained by far the most traction, probably because of the unpopularity of big banks.
The objectives of different Robin Hood Tax campaigners, however, can be very different. The US Robin Hood Tax organization wants to spend most of the money raised “to protect American schools, housing, local governments and hospitals,” while sending much smaller sums overseas to help provide schooling and AIDS care in poor countries. Its UK sister organization seems to be more focused on providing help for the poor. Aid organization Oxfam stresses funding to fight global poverty and climate change.
What’s the Best Way to Design an FTT That Is Also a Robin Hood Tax?
In the loose terms used by the main Robin Hood Tax umbrella groups, ordinary income tax is a Robin Hood Tax, since the rich pay far more in income tax than the poor. Any Robin Hood Tax worthy of the name should focus on helping the truly poor – people living on less than $2 a day – rather than simply meeting general government expenses in the rich countries in which it is levied. On the other hand, an FTT benefiting only foreign aid budgets is very unlikely to be supported by voters.
A reasonable compromise might be to set a hurdle beyond which all proceeds collected will go toward supporting official United Nations anti-poverty efforts. For example, the first $50 billion per year raised by a US FTT could go to general government revenue, with any excess going to UNICEF, the United Nations Children’s Fund. This would have the advantage of making the FTT anti-cyclical for the US economy: when financial bubbles occurred, they would be dampened by sending the excess proceeds overseas.
Does a Strong FTT Stand Any Chance of Being Passed in the United States?
Maybe. The US has levied a FTT on stocks in the past, and the Center for Economic and Policy Research points out that Sen. Tom Harkin and Congressmen Peter DeFazio, Peter Stark and John Conyers have introduced several FTT bills in recent years. Many civil society organizations have come out in support of an FTT, including (most assertively) the nurses’ union National Nurses United. The Huffington Post even suggests that Barrack Obama secretly plans to make an FTT the centerpiece of his re-election tax policy.
On the other hand, banks and financial companies can be counted on to spend aggressively to quash, defeat and water down any potential FTT legislation that comes before Congress. In the post-Citizens United era of unlimited corporate campaign spending, it is hard to imagine a tax that is so closely targeted at one (very rich) industry becoming law. A triumph of democracy and good economic policy over unlimited corporate spending power is always possible, but it is perhaps unlikely in today’s United States of America. Better luck in Europe.