Financial Industry Split on Speculation Tax

Wall Street lobbyists have the luxury, at least for now, of largely ignoring calls for a U.S. tax on financial speculation. While Senator Bernie Sanders made such a tax a centerpiece of his presidential bid, the Republicans who now control Washington are focused on delivering tax cuts — not increases — to their banker friends.

But in Europe, it’s another story. Ten EU governments have committed to imposing a small tax on stock and derivatives trading as a way to raise massive revenue for urgent needs while also encouraging longer-term sustainable investment.

And while the European negotiations over tax design have dragged on for several years, they are now close enough to cutting a deal to make industry opponents genuinely worried. The financial lobby is putting particularly intense pressure on the new French president, Emmanuel Macron. A former banker, Macron is viewed as a potential weak link in the coalition that has been working to develop the tax.

To help counter this pressure, 52 senior financial professionals have broken rank with their industry peers and released a joint statement in support of financial transaction taxes (FTT). The signers include Lord Adair Turner, the UK’s former top financial regulator, Rob Johnson, president of the New York-based Institute for New Economic Thinking and the former managing director at Soros Fund Management, and Luc Bomans, a former JPMorgan Chase executive vice president and former CEO of the Euroclear Securities Clearing System. Numerous leaders in the impact investing community also signed the letter, including Amy Domini and Robert Zevin.

Released in advance of a July 10 EU finance ministers meeting, the statement urges leaders of the 10 participating governments to “do all in your power to finalize FTT negotiations so that implementation may happen at the earliest time.” The financiers argue the taxes “will rebalance financial markets away from a short-term trading mentality that has contributed to instability.”

Much of today’s financial activity, the financiers add, does not advance the goals of raising investment, allocating resources efficiently, or mitigating risk.

“FTTs of a small fraction of a percent on each trade,” they argue, “would moderate the incentives for such short-term speculation while having a negligible impact on long-term investment.”

On top of the market stability arguments, such taxes would go a long way towards reducing inequality. The prime targets would be the high-flyers in the financial casino, the ones with the capital to take advantage of high-frequency trading schemes that drain profits from ordinary investors. As Dean Baker, co-director of the Center for Economic and Policy Research, pointed out in a recent article, the tax would also lead to downsizing in the financial sector, which is known for extremely fat paychecks.

For most private pension funds and traditional stock-and-bond-holders, the cost of the tax would be negligible — less than typical portfolio management fees. An FTT would be “quite progressive,” concludes the Washington, D.C.-based Tax Policy Center.

Financial transaction taxes would also raise massive revenues that could be invested to reduce inequality, in everything from job creation and education to health care, and climate change mitigation for our most vulnerable communities. In March 2016, the Joint Committee on Taxation estimated that a U.S. FTT of 10 basis points could generate more than $717 billion over 10 years.

The most recent European Commission figures set the potential revenue at about 22 billion euros per year for the 10 participating countries (France, Germany, Austria, Belgium, Spain, Greece, Italy, Portugal, Slovakia, and Slovenia). The Commission recently issued a paper urging EU leaders to consider new common taxes, including a financial transaction tax, to cover the $11.4 billion budget hole expected as a result of Brexit.

Brexit might’ve created an opening for the FTT in other ways. Under Conservative Party leadership, the United Kingdom has been hostile to the idea, even at one point turning to the European Court of Justice in a failed attempt to block other governments from introducing the tax. But the recent UK election, called to strengthen Prime Minister Theresa May’s hand in Brexit negotiations, actually helped advance the issue in that country.

In that election, the Labour Party included the financial transaction tax in its party platform for the first time. And despite dismal expectations, Labour leader Jeremy Corbyn managed to mobilize a huge army of younger voters to strip the Conservatives of their majority and push them into a fragile coalition government.

“Labour presented a well-thought out, well-costed progressive alternative to the Conservatives’ austerity agenda,” notes David Hillman, director of the London-based Stamp Out Poverty and a key leader of the European FTT campaign. “The fact that Labour’s progressive manifesto, which included the FTT, has received such an endorsement from so much of the electorate, undoubtedly helps move the policy into the mainstream. Taking full advantage of this will dominate our work in the UK in the coming months.”

Hillman and other European FTT campaigners are also mobilizing pressure on Macron, who has been waffling in his position, an ironic stance given the enthusiastic support for the FTT from Macron’s two predecessors.

At the 2009 G-20 Summit in Pittsburgh, conservative French President Nicolas Sarkozy joined with German Chancellor Angela Merkel and then-UK Prime Minister Gordon Brown to push for a G-20 agreement on such taxes, only to be rebuffed by Canada and the United States. Sarkozy pushed the issue again when he hosted the G-20 summit in 2011. In 2015, François Hollande, as French president and host of the Paris climate summit, committed to allocating 100 percent of the money raised from a European FTT to fighting global poverty and climate change.

According to Oxfam France advocacy officer Alexandre Naulot, Macron has been engaging in doublespeak.

“In Paris, faced with climate experts, he promised a tax by this summer,” Naulot observed in a press statement. “In Brussels, among his counterparts, he suggested that Brexit could sound the death knell of the FTT.”

Naulot was referring to media reports that Macron, at a meeting of the European Council, expressed the view that EU FTT negotiations should be put on a back burner until the conclusion of the Brexit negotiations. This, Naulot fears, would have the effect of burying the tax proposal.

The French campaign is not ready to back down. FTT advocates made sure the financial industry letter was published in a leading French financial newspaper. Signing that statement was a bold move for people surrounded by peers hostile to the idea of taxing financial speculation. Their voices should carry tremendous weight in what will hopefully be the final — and successful — phase of the European negotiations.