More thoughts on the financial-transactions tax

November 18, 2009 | By: Robert A. Green, CPA

At the G20 meeting Nov. 6-7 in Scotland, the idea of a global financial-transaction tax received a mixed response. UK Prime Minister Gordon Brown said a tax of this nature could be used to fund future bank bailouts; France and Germany agreed. U.S. Treasury Secretary Timothy Geithner spoke out against it, and Canada and Russia don’t support it as well. The IMF leadership said they aren’t in favor of this tax, however, they faced backlash from their statements. Supporters of the tax strongly suggested the IMF wait to solidify its stance until its official April 2010 report, asking the IMF to give the tax its due process and consider all options.

It seems as though the IMF ultimately won’t support the tax, but for now, we have to wait until it releases its April report. 

I have spoken out against this tax from the beginning, and my stance hasn’t changed. The good news is, with countries in the G20 divided on the issue, it seems less likely to gain traction. No country wants to enact a financial-transaction tax if it is going to lose business to other countries that do not. This is much like the issue of climate control — everyone wants to participate only if everyone participates.

In the U.S., this tax would be harmful to traders and other businesses — those people hurt by the tax will take their trading business elsewhere, trading the U.S. markets less, which in turn will reduce commissions and jobs, and hurt the overall market and economy.

Is the tax still a possibility in the U.S.? 
Rep. Peter DeFazio (D-Ore.) continues to support the tax in the U.S., selling it with the notion the revenue generated from it will go toward infrastructure and healthcare. I do believe DeFazio and other supporters will continue to propose these taxes, and it’s important to note that if leadership does support it, it will be hard to stop. However, with Geithner’s recent comments at the G20 and other opposition to the tax surfacing, I feel the chances of the tax being passed are slim.

Update on Nov 18. Just as presumed, Congressman DeFazio and other progressives and big-labor supporters in Congress are scrambling to include a financial-transaction tax as part of new jobs bills in the U.S. House of Representatives. See the latest news below and my updated comments on that news too (coming later today on the blog). 

If the discussions of this tax don’t evaporate globally and in the U.S., I hope supporters will think about exempting traders from it. (In fact, the news last night mentions that DeFazio includes an exemption for the first $100,000 of small investors’ trades – see more on my next blog tonight. Business traders would blow through that exemption in one day.) 

UK proponents argue traders don’t add value to society; this is flat-out false. True, traders aren’t saving lives every day like doctors, but they are creating an honest living for themselves and their families, and adding liquidity to the marketplace. Another argument for this tax is Wall Street caused this recession we’re in today, so it should have to pay for it. This is also inaccurate. The economy’s downward spiral was caused by the real estate bubble and poor lending practices — sub prime loans knowingly issued to candidates who could not afford them in the long term.

Pillars of society
Throughout history trading has been a valid activity — a sign of strength and power in the U.S. and UK. If a trader wants to trade and pay his local and state taxes, he has that right. Traders turn around and support their neighbors with commerce because they are making profits. Our trader clients are in all areas of the U.S. — from big cities to small rural areas, and everywhere in between — using the same tools as Wall Street. Labeling traders as “useless” and hitting them with a “vice” tax is outrageous. 

This tax would be a step in the wrong direction. Conservative author Ayn Rand (Fountainhead, Atlas Shrugged) was an advocate of individual rights. She argued society is better when individuals seek to take care of themselves, becoming “pillars of society” and not “second-handers,” or those who look to others to get them through life. Rand’s ideas from the 1940s and 1950s are still valid today. If we stop respecting individual rights, the result will be very dangerous for society, and we’re leaning in that direction with this tax.

Financial-transaction tax vs. bank bailout approach
As I have said previously, a transaction tax is a shotgun approach, killing small business traders. It may look good on paper, but it’s difficult to assess, implement, and collect. Deciding how to spend the revenue generated would be difficult — it would likely end up in a general fund and not be available for a bank bailout. Also, there are numerous products traded, some of which are traded off exchange, so it would be very difficult to gain access to all transactions efficiently to assess the tax. The tax might look good on paper, but developing a working model is sure to be problematic. 

Conversely, a bank bailout fee (or levy, or tax) already has a good working model, such as the FDIC, and those taxed during a bailout are a small number of financial institutions — roughly thousands vs. the hundreds of millions of traders that would be affected by a financial-transaction tax. A bank bailout fee is much easier to assess as well. This seems to be the approach best-supported by Secretary Geithner and the IMF — who is weighing the options of either an IMF bank levy or a global financial-transaction tax. IMF officials have indicated they prefer the bank levy approach. The progressives in the UK are holding them to task, asking them not to rush to make a judgment. Their official report is expected to be released in April 2010. 

In the U.S., progressives may still push for a transaction tax, but our legislative calendar is probably similar to the IMF calendar. The House may include a financial-transaction tax in a jobs bill before year-end, but the Senate probably won’t until Q1 2010. Raising taxes in 2010 may be dangerous with the 2010 mid-term elections. 

Both a levy or a financial-transaction tax bring some of the same questions. Should the approach be implemented globally, or should individual countries make their own decision? And what should the money be used for? I think a realistic answer to the latter question is to develop an “insurance” fund used to prop up banks when necessary; certainly the FDIC is running short of money, and having that type of bailout fund is a smart idea. This is what the U.S. and IMF leadership say they will support; let’s hope they keep this stance.

Balance is needed
A financial-transaction tax is not in the interest of the U.S. — it’s a “punishment” tax that would be difficult to implement, and there would be unintended consequences. If you want to raise taxes, let the banks pay the bonuses while the government collects the taxes on them. Remember, banks need to become profitable again and build up their profit base; they need support now more than ever. There’s a lot of “fighting in the family” occurring while we try to climb out of this severe recession. If Wall Street is home to fat cats while the rest of the public goes hungry, no one is winning. We need balance to get out of this battle of the classes and battle of the industries. 

Update: More news released last night (Nov. 17), just after we wrote this piece. 

Just as presumed, Congressman DeFazio and other progressives and big-labor supporters in Congress are scrambling to include a financial-transaction tax as part of new (high-priority) jobs bills in the U.S. House of Representatives. See this news in the Google Alert links at the bottom of this blog.

I am preparing a letter for traders to email their Congressmen. DeFazio wants to use a financial-transaction tax to help pay for a new jobs bill. My big point is that this tax will put traders out of a job and you need to let your Congressman and the supporters of this tax know that too. Let’s get together a 100,000 signatures to show 100,000 potential job losses. Let them put that on for safe, created and destroyed jobs. Here are my Voice Notes for this letter. The first file is . It was cut off after 8 minutes, so please pick up where it left off on Part II below .

Stand by, more to come tomorrow, including Green’s specific replies to the new DeFazio proposals. 

Google News Alert for financial transaction tax:

Dems eye stock trade tax
The Hill
Small- and medium-sized investors would hardly notice a transaction tax, but major trading firms may see it as a significant threat to their profits…
See all stories on this topic.

US House plans jobs bill before year end
Some of these programs could be funded by a transaction tax on Wall Street, or money left over from the financial-industry rescue package, said the House’s …
See all stories on this topic.

Thomson Reuters to acquire Sabrix from venture capital firms
Trading Markets (press release)
… through its Tax & Accounting business, has entered into a definitive agreement to acquire Sabrix, Inc., a provider of transaction tax management…

Protestors to Goldman Sachs: “You Are Not God” – Bernanke Explains Why
Huffington Post (blog)
A good way to do this would be to impose a small financial transaction tax on all profitable stock transactions. A study by Dean Baker’s Center for Economic …
See all stories on this topic.

The Hindu
In the circumstances, many argue that Brown’s declaration of support for a financial transactions tax may just be his last effort to gain populist mileage …
See all stories on this topic.

How feasible is a financial tax to fund adaptation?
Reuters AlertNet
The advantage of a financial transaction tax, he says, is that it creates “no burden on the ordinary tax-payer and (is) able to raise more money…