A Financial Transaction Tax Harms US Capital Markets and Individual Investors

The original concept behind modern financial transaction taxes (FTT) was the Tobin Tax. This proposed, but never enacted, currency transaction tax was meant to eliminate exchange rate differentials among countries across the globe.

The original Tobin proposal was meant to maintain the benefits capital markets bring to investors and economies. It was not meant to impact long term investments, nor was it meant to be a revenue generator for governments with ballooning deficits. Tobin himself disavowed this tax as a means of revenue raising for social purposes and eventually backed off his own proposal.

Despite the fact that the proposed benefits of a Tobin Tax have always been, and remain today, controversial, many countries have tried versions of this tax, now commonly known as FTTs. The primary driver behind FTTs is to raise revenue and curb volatility. The results have failed to meet these objectives. FTTs have been shown to harm individual investors, and the harm generally outweighs any benefits.

FTTs tend to miss revenue generation projections, as they do not account for the ability to shift volumes to other trading venues/jurisdictions. The inevitable reduction in volumes decreases the taxable base, which in turn diminishes the amount of revenue collected. Further, empirical evidence does not show that FTTs significantly impact volatility at all, let alone decrease it. More often than not, the opposite effect occurs. The migration of volumes decreases liquidity, leading to higher volatility.

Therefore, we ask:

• Why increase costs and lower returns for individual investors?
• Why increase funding costs for municipalities and the federal government?
• Why increase prices of consumer goods?
• Why risk the competitive positioning of U.S. capital markets and therefore threaten U.S. economic growth?
• Why risk these harms when FTT outcomes across the globe have proven to sway far from expectations?

As shown in this report, FTTs fail to reach objectives on the following accounts: (a) they increase costs and lower returns for individual investors; (b) they typically, and often significantly, miss revenue generation projections, as the taxable base declines with volumes; (c) not only do they not curb volatility but instead increase it as trading volumes decline, harming capital markets; (d) they increase financing costs for municipalities, the federal government and corporations; (e) they increase prices for consumer goods; and (f) they generally damage economic growth by decreasing revenues and jobs in the U.S. as volumes migrate.

In this report, we use case studies from across the globe to assess the potential ramifications of FTTs.

 

 

Author

SIFMA Insights
Katie Kolchin, CFA

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