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The European Union and other governments are closely watching France's just-debuted financial-transactions tax.
Andrew Sawers, CFO.com | US
August 8, 2012
France's long-awaited financial-transactions tax (FTT) came in with a whimper rather than a bang on August 1. The so-called Tobin tax is named after Nobel Prize–winning economist James Tobin, who proposed a tax on foreign-currency transactions some 40 years ago.
Proposals for a European Union–wide Tobin tax aimed at the unloved financial sector — potentially hitting financial instruments, derivatives, and foreign exchange — have been debated for some time, but France is the first country to go it alone.
The French tax, however, is limited in scope: it applies to all purchases of shares in companies with market capitalization of more than €1 billion, "naked" short sales of sovereign credit-default swaps, and some high-frequency trading. French plans for a more wide-reaching tax are said to be on hold until there is agreement on an EU-wide FTT.
Legislation for France's FTT was enacted earlier this year by former President Nicolas Sarkozy. The recently elected François Hollande retained the measure but doubled the rate to 0.2%. Ironically, one of the EU countries most opposed to a broad-based FTT is the United Kingdom, which has a 0.5% "stamp duty" on share purchases. (Different rates of stamp duty cover the purchase of land and property, but financial transactions other than share purchases are not covered by the duty.)
The United Kingdom has argued that an FTT would be feasible only if it were applied globally. "Without global consistency," said Mark Hoban, the U.K. financial secretary to the Treasury, in a speech last year, "those transactions covered by the tax would merely relocate to countries not applying the tax, with a potential loss of 500,000 jobs across the EU."
NYSE Euronext, which operates the main stock exchanges in Paris, Amsterdam, and Brussels and the financial futures exchange in London (Liffe), is reasonably relaxed about the tax as it currently stands. "We do not expect the French FTT to have a serious impact on liquidity, since it is considerably lower than the stamp duty in place in the U.K. for many years," Mark MacGann, senior vice president and head of government affairs and public advocacy, tells CFO European Briefing. "Nonetheless, it is an additional burden on investment in Europe's real economy at a time when responsible market actors are seeking to rebuild confidence and trust in the capital markets."
The French government expects its tax to raise €170 million ($210 million) this year and €500 million ($620 million) next. Some of the proceeds are apparently being earmarked to fund AIDS research. But Sam Bowman, policy director at the U.K. pro-free-market think tank Adam Smith Institute, said recently that the forecast tax take is "a small-enough figure, even before you remember how bad governments have been at projecting Tobin tax revenues."
Bowman noted that Sweden introduced a Tobin tax on share purchases and foreign-exchange dealing in the 1980s but overestimated revenues by about 40 times as trading moved elsewhere. Sweden scrapped the tax within 10 years and, along with the United Kingdom, has been a vocal opponent of an EU-wide FTT. He added that there is evidence that Tobin taxes make markets more volatile, not less: "High-frequency trading adds volume and liquidity to markets, reducing volatility."
NYSE Euronext's MacGann is critical of FTTs. "Contrary to the political discourse associated with such measures, it is not global investment banks that end up paying such a tax, but rather the very investors that governments should be encouraging to return to Europe's equity markets," he says. "Investors, and in particular asset managers and pension funds, will foot the bill for this tax."
European governments and the EU itself will watch and wait. If France's FTT works, expect them to follow suit. But if financial trading moves out of France to London, Frankfurt, and Amsterdam, then they will enjoy the spoils as Paris's financial sector turns to French toast.
Andrew Sawers is editor of CFO European Briefing, a CFO online publication.