EU nations Move Towards a Financial Transaction Tax
By Bill Barclay,
At our 2009 national convention, DSA endorsed a proposal for a federal jobs program that was to be funded by a financial transaction tax (FTT). An FTT is a small levy on the trading of stocks, bonds, currencies and derivatives based on these assets.
That event marked the beginning of what has been a long political struggle to implement an FTT. In the U.S., Representative Keith Ellison, co-chair of the House Progressive Caucus, proposed legislation to create an FTT and, more recently, has been joined by presidential candidate Bernie Sanders (HR 1464/S 1371) in proposing the tax. Sanders has proposed using revenues from an FTT to finance attendance at publicly funded colleges. This legislation, which would raise $350–500 billion annually, has not moved. Now, however, there has been a major step forward towards victory in the struggle to raise revenues by taxing financial instruments – but in Europe rather than in the U.S.
Why an FTT?
Before describing this step it is worth reminding ourselves of both the reasons for and the importance of an FTT. The financial crisis of 2007/08 and the resulting Great Recession of 2007–09 were the product of a bloated and inefficient financial sector. During the several years leading up to the 2008 financial crisis, the share of corporate profits going to finance ballooned from less than 20% to almost 45% – and this from a sector of the political economy that employs less than 5% of the total labor force. And, of course, with a huge increase in money went a huge increase in political power. Finance is consistently one of the top three sectors both in political contributions and in terms of the number of lobbyists employed in Washington, D.C. – more than two people for every sitting Congressperson.
But our finance sector is also inefficient. Here is one simple measure of that inefficiency: the share of each dollar raised for investment that goes into the coffers of finance is greater today than it was a century ago, during the halcyon days of what Lenin and Hilferding labeled “finance capitalism.” This was the era of J. P. Morgan and John D. Rockefeller, of the trusts in steel, copper and other industries that were made possible by finance.
So, how can finance today be less efficient than in that era? The answer in one word is “trading.”
The financial sector is more efficient in its payments role – it no longer takes five business days for a check to clear your bank. It is also a safer place – and thus more efficient from the perspective of society as a whole – for you to store your accumulated wealth. In contrast to the 1930s, few of us rushed to our local bank during the 2007 crisis, seeking to draw out all our money because we were afraid that the bank would collapse and we would lose all our savings.
But it is in the financial markets where we see the inefficiency, waste and increase in risk taking that has made finance less efficient and more dangerous to the political economy a whole. A single simple measure captures what has happened: in 1975 the average share of stock was held for four years; today that holding period is less than a year. And, of course, for high-frequency trading (HFT) firms, the holding period can be measured in seconds. It is the explosion of trading in capital markets that accounts for the decline in the holding period of stocks and other financial assets, as well as for the increased leverage ratios that drove the collapse of Lehman Brothers, AIG and other firms. Trading is also a major source of the obscene levels of executive compensation that prevail in much of the financial sector.
So, while an FTT is not a complete solution to out-of-control finance, it is an essential step in that direction and, in addition, will raise a large amount of revenue from firms and individuals who can well afford to support the public good.
What did the EU nations do?
On December 8, ten nations announced an agreement on “core issues.” Two in particular are important because, while they may seem technical in nature, they are key to an effective FTT.
First, the proposed FTT will apply on a “gross” rather than a “net” basis. That is to say, it will apply to all trades that occur, not just to those still in effect at the end of the trading day. This is a major defeat for the HFT constituency.
Second, in order to counter various tax avoidance tactics, the FTT will apply if at least one of the parties to the trade is a resident in one of the ten participating countries and/or if the asset traded is issued in one of these countries.
In addition, it looks as if the proposed FTT will apply to both the assets themselves as well as to derivatives based on the assets. This is very important, since it eliminates another way of avoiding the tax.
The ten EU nations now have six months to flesh out the rates, the use for the revenues and the time frame for implementation. This EU decision should be used by all to increase pressure on Congress, the president and all presidential candidates to move forward in the U.S. Time for us to stop being laggards on this issue.
Bill Barclay co-chairs Chicago DSA, is a founding member of the Chicago Political Economy Group, serves as DSA National Member Organizer and represents DSA on Illinois' LaSalle Street Tax Coalition
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