The European Commission earlier this month proposed a new financial-transaction tax for 11 participating states, including Germany, France, Italy, Spain, Belgium, Austria, Slovenia, Portugal, Greece, Slovakia, and Estonia. These produce roughly two-thirds of the EU’s economy.
It’s an enormous tax, too, in a market where spreads are on the order of pennies, even fractions of pennies: 0.1% for trades in bonds and shares, and 0.01% for derivatives transactions, and it would apply to both buyers and sellers
as long as either of them is based in one of the participating states, or if the financial instrument being traded was issued in any of these countries.
As damaging as this tax is, they’re not done. The tax is intended to suppress trading:
[The European Commission’s] own impact assessment estimates that the number and volume of trades in shares and bonds could drop by around 15%, while derivatives transactions may drop by as much as 75%.
Never mind that this activity—especially its volume—contributes to the liquidity of the instruments and so contributes to holding down their price to buyers. Which facilitates more general investing in companies—their source of funds for R&D, plant expansion, even hiring.
But wait, there’s more: they’re claiming the right to tax folks outside their jurisdiction—we Americans, investing here in the US, for example, as a result of those domiciliary and passing-through aspects.
This tax will hurt us: Paul Jiganti, Managing Director of Market Structure and Routing Strategy at TD Ameritrade Holding Corp, estimates that
a typical [American] customer who pays $9.99 to buy 1,000 shares priced around $35 apiece could see that charge rise sevenfold, to around $70 on the trade.
Which will have the EU’s desired outcome. Jiganti was caught by surprise by all of this:
To be honest, I thought that cooler heads would prevail. I thought the US government would take care of it before it really became an issue.
For all of Treasury’s sharp words about the tax, though, don’t expect any real action. President Barack Obama, Treasury’s boss, has never met a tax he didn’t like. He’s not going to oppose this one in any meaningful way.