As the European sovereign debt crisis comes to a head, some members of the European Union are pushing to implement a financial transaction tax on an EU-wide, if not global, scale. The tax, which was proposed by German Chancellor Angela Merkel and French President Nicolas Sarkozy, has become a dividing issue with some countries, such as Germany and France, for it and others, such as the UK and Sweden, against it.
Anthony Belchambers, CEO of the London-based Futures and Options Association (FOA), says there are two reasons France and Germany are calling for the tax. "As a politically driven initiative, the idea behind the financial transaction tax is that it will deliver on a number of largely politically oriented objectives," he says. "The first of which is to build up a cash bank, for obvious reasons. The second is to try and reduce speculation or any form of inappropriate trading in the marketplace by making it much more expensive."
Although the tax revenue has not been earmarked yet, Belchambers says it likely would go toward either a "rainy day pot in case of major defaults," or it could be used to plug entitlement gaps that could come as part of austerity measures.
In addition to worries about regulatory arbitrage where customers could just trade on exchanges in other parts of the world without the tax, Belchambers says the FOA has two objections to the tax. "First, it will be a pass-on cost to end-users. By that, we’re talking about pension funds, corporate users of commodities and risk management transactions, so it sort of will be a tax on savings, investment and growth," he says. "Second, it will limit institutions’ ability to hedge their positions freely because it will be another add-on cost to the economics of risk management transactions."
Although Belchambers says the European Parliament is likely to pass the tax, he says it is likely to hit a wall in the European Council where tax issues must receive unanimous consent from all member states, something he says is unlikely to happen.
In the United States, Rep. Peter DeFazio (D-Ore.) and Senate co-sponsor Sen. Tom Harkin (D-Iowa) have proposed a similar transaction tax that would cover trading of stocks, bonds and derivatives. The idea also has taken root with the Occupy Wall Street movement, which has built some steam in a short period of time.
Industry leaders already have begun a counteroffensive. Speaking at the 2011 FIA Expo in Chicago, CME Chairman Terry Duffy says the proposed tax would do little more than add to the price of food. "If you want to see the price of food rise, just throw on a transaction tax," he said at the event.
Duffy reiterated that those suggesting a transaction tax need to realize that "we are not the only game in town in these markets. We need to remain competitive… [I would] hope the United States would not fall victim to such a ridiculous tax."