A Tax That May Change the Trading Game

By FLOYD NORRIS

To the dismay of the United States government — not to mention Wall Street — much of Europe seems poised to begin taxing financial trading as soon as next year.

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Under the proposal, a trade of shares worth 10,000 euros would face a tax of one-tenth of 1 percent, or 10 euros. A trade of a derivative would face a tax of one-hundredth of 1 percent. But that tax would be applied to the notional value, which can be very large relative to the cost of the derivative. So a credit-default swap on 1 million euros of debt would have a tax of 100 euros, or about 0.4 percent of the annual premium on such a swap....there would nevertheless be significant changes — changes that might be for the better in some ways. High-frequency trading, which was encouraged by allowing prices to move in increments of a penny or less, and by technological advances, would be discouraged. So too would be some of the strategies used by hedge funds that involve trades expected to yield very narrow — but presumably very safe — profits. To make such trades worth doing, funds borrow a lot of money and make the trades using very little equity...One objective, says Algirdas Semeta, the European Union commissioner in charge of tax policy, “is to reorient the financial system back to financing the real economy.”

But can Europe pull it off? Will trading simply migrate to other jurisdictions, such as the United States and Britain, which want nothing to do with the tax? Europeans seem confident. The tax would be owed no matter where the trade took place, as long as a European security or European institution was involved. The law has been written so broadly that if a French bank bought shares in an American company on the New York Stock Exchange, the tax would be owed...the European Commission director for indirect taxation and tax administration and a primary designer of the tax plan, calls it a “Triple A approach — all markets, all actors and all products.”

To get out of the tax, a financial institution would have to do more than simply move its headquarters out of the 11 countries that now plan to impose the tax. It would also have to forgo serving clients in any of those countries and trading in securities or derivatives from any of the countries. Officials are confident that no major institution will be willing to forsake such large markets as France, Germany, Italy and Spain.

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http://www.nytimes.com/2013/02/22/business/a-tax-that-could-change-the-trading-game.html?&pagewanted=all

Harkin, DeFazio Welcome EU Action on Transaction Tax; Announce Plans to Reintroduce U.S. Bill

WASHINGTON, D.C. – Senator Tom Harkin (D-IA) and Congressman Peter DeFazio (D-OR) today welcomed a vote taken by 27 EU finance ministers to allow a group of 11 European governments to implement a financial transaction tax. The action allows for a tax of 10 basis points on stocks and 1 basis point on derivatives on financial transactions by the following countries: Germany, France, Italy, Spain, Belgium, Austria, Greece, Portugal, Slovakia, Slovenia, and Estonia.

In the U.S. Congress, Senator Harkin and Congressman DeFazio have introduced The Wall Street Trading and Speculators Tax, which applies a three basis point tax (or 3 cents on every $100 financial transaction.) The Congressional Joint Tax Committee scored their proposal as raising $352 billion over 10 years in the last Congress. The lawmakers will reintroduce their measure in the coming weeks.

The lawmakers will reintroduce their measure in the coming weeks, including an exemption for retirement and education savings.

“Our transaction tax proposal raises considerable revenue with little impact on economically beneficial transactions,” said Harkin. “It is a tax that does not harm small businesses or the middle class and Wall Street can certainly afford it. I applaud the action taken by the EU today and hope that we will soon have U.S. action on this issue.”

“In the coming months, our country will need to make hard decisions to get back on sound fiscal footing. Our financial transaction tax should be a no-brainer. This tax would target speculators who create tremendous volatility by flipping stocks a thousand times a minute. I, too, applaud the EU. Today's actions mean there will be less opportunity to shift U.S. trading overseas to avoid a U.S. FTT. Wall Street's criticisms of an FTT are rapidly shrinking,” said DeFazio.

http://www.harkin.senate.gov/press/release.cfm?i=339332