The Financial Transaction Tax

In the face of a faltering European economy, France’s President Nicolas Sarkozy has proposed a new tax to yield some additional revenue, an unprecedented move for the conservative French leader.  The “Financial Transaction Tax” would affect financial institutions’ transactions on a day-to-day basis, returning some of that money to the government.  While European economists are divided on this issue, American economists are wondering if a similar tax could help rein in some of the unbridled Wall Street trading occurring in the United States.  If support for a Financial Transaction Tax gains traction in Europe, there is hope that such a tax could alleviate some of the problems that caused the massive financial collapse in the U.S. “The collapse of 2008 decimated retirement accounts,” says Phil Cannella, noted retiree advocate and founder and CEO of Retirement Media, Inc. “People may have different feelings about different solutions, but it’s good to see leaders exploring ways of preventing catastrophe for millions of blameless investors.”

The proposed tax would be a 0.1 percent charge on equity and bond transactions, and a 0.01 percent tax on derivatives.
The European Union’s (E.U.’s) executive body, the European Commission, has suggested the tax could raise as much as 55 billion Euros ($71 billion) each year.

In Europe, Sarkozy has said France will push to implement this tax, even if it is the only Eurozone country to do so, saying, “If France waits for others to tax finance, then finance will never be taxed.”  Of course Sarkozy has also stated that he would like to gain the support of other European countries, in order to prevent France from suffering an economic disadvantage after the tax is implemented.  Namely, France’s economy could further decline as financial institutions set up shop in other Eurozone countries where financial transactions are not taxed.

Some European leaders, like German Chancellor Angela Merkel, have come out in support of the new tax, while others, like British Prime Minister David The Financial Transaction TaxCameron, feel it will only work if implemented by every world economic power simultaneously.   Of course, that prospect seems unlikely and Sarkozy is now attempting to drum up support from other European nations.  The debate will continue, and until such a tax is implemented, it will be difficult to predict whether it will help or harm that nation’s economy.

Could a Financial Transaction Tax help the United States overcome its economic difficulties?  It is possible that such a tax could generate revenue while at the same time discouraging some of the high-frequency and speculative trading that created the financial meltdown.  On the other hand, the U.S. could be at a disadvantage in the global economy if other countries do not adopt similar taxes.  Similar to the situation in Europe, American economists worry the tax could threaten the United States’ status as a trading powerhouse, and may cause financial institutions to move to countries with no Financial Transaction Tax.  Some in the financial industry also believe that the tax’s costs will be passed on to investors.  They believe that if the tax is levied each time money changes hands over the course of a complex financial transaction, the small percentages could end up becoming much larger by the time the transaction is completed.  Financial industry insiders also feel the tax could slow economic growth by discouraging brokers from taking risks.  They argue that the activities meant to be discouraged by the Financial Transaction Tax are actually a necessary part of investing and that hindering them in any way will lead to a serious decline of the economy.

In the U.S., support for such a tax is likely to fall along party lines.  Historically, Republicans have generally supported lowering taxes, as well as removing regulation from the financial industry.  Democrats have advocated more regulations on Wall Street and higher taxes on the wealthy to help pay off the national debt.  Again, it is impossible to predict how such a tax could affect the economy if implemented, but one thing is certain:  The mere suggestion of a Financial Transaction Tax in the United States will incite grumblings in Congress.  At this point, all eyes are on Europe.  If the E.U. can come to an agreement on this issue, it may be prudent for the U.S. to follow suit. “Tax or no tax, this much is sure,” says Phil Cannella. “If we can unite globally against unscrupulous trading practices, perhaps we can rid the world of the kind of “financial bubbles” that devastate economies when they burst.