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Journalist asks thoughts on FTT

January 27, 2010

A journalist contacted me for help with his story on the financial transaction tax.

"Mr. Green, I’d like to quote you in my story, if I may ... I’m writing a story on DeFazio’s jobs bill, H.R. 4191, for Money Manager’s Compliance Guide. Our readership consists of registered investment advisers, with a small proportion of subscribers being advisers to hedge funds. You wrote for Active Trader’s February issue concerning the small investor exemption of $100,000 in Mr. DeFazio’s bill, “This exemption is a mirage; the poorly priced markets will have higher or lower prices and that will cost every investor – buyers and sellers,” Could you elaborate just a little bit more on what you meant by “poorly priced markets” and possibly spell out how the tax would have an effect, e.g., would the tax inflate price?

I’d also like to invite any further comment you have on the bill in general. Do you still give the bill -- or similar proposals -- a low chance of passing Congress? Since publication of your article, congressional democrats have been dealt several setbacks, i.e., the GOP win in Massachusetts. Do you think that changes the game for the worse for this bill or – not to put words in your mouth – but were chances already pretty slim that the recent developments don’t make a difference? Just wondering what else you might like to say in support of your opinion, if anything."

Here's my written answer to him. We discussed it over the phone as well.

"Poorly priced markets" means wider bid and ask spreads and less liquidity due to many small-business traders (ECN market-makers) going out of business and remaining traders having less incentive to speculate and actively trade. Your inference is correct — some traders will consider the financial transaction tax to be an additional transaction cost they seek to recover by asking for higher sales prices and lower bid/purchase prices too. Even if a small fraction of investors are exempt from the transaction tax, the tax paid by the person on the other side of their trades will translate into higher purchase prices and lower sales prices, which is tantamount to the exempt investor sharing the tax burden with the taxed investor. Secretary Geithner reached this same conclusion stating this tax would fall too heavily on the retail investor.

By the way, some proponents of the tax are currently citing the existing UK stamp duty (financial transaction) tax as good working precedent for a financial-transaction tax. That precedent is purposely miss-marketed and it’s a bad precedent. Market-makers and other qualified market participants are exempt from the UK stamp duty tax, and that exemption translates to 70 percent of transaction volume. The UK stamp duty tax falls entirely on the retail investor, which directly contradicts the U.S. administration's intention. I believe UK domiciled residents get an income tax credit on their stamp duty taxes paid, and that's not part of any U.S. financial-transaction tax plan. I believe the UK stamp duty tax is intended to capture taxation on non-domiciled UK residents on their otherwise non-taxed offshore accounts.

The U.S. administration's new bank-fee plan addresses these glaring problems of taxing the small retail investor. The U.S. bank fee falls directly on the largest banks and financial institutions operating in the U.S.; it's not intended to be passed on to small retail investors. This is why the U.S. chose a narrow-targeted bank fee and Volcker Rule over a shotgun financial-transaction tax with many unintended consequences falling on investors. The UK, IMF, Europe, and G-20 are now also embracing the U.S. bank fee/levy approach over a financial-transaction tax.

The other big problem that comes with a FTT is transactions will quickly move to unregulated and foreign exchanges where the tax is not implemented. The chairman of the German exchange just made this important point too. Sweden learned a lesson from implementing a financial-transaction tax in the early 1990s; their financial exchanges plummeted in value and transactions and Swedish stock listings moved to London. Sweden repealed that tax soon thereafter. Now, Sweden is strongly urging Europe not to make this same mistake and to use a bank levy instead.

The current financial-transaction tax bills in Congress are now faulty. I believe they can't be voted on as structured. Both the Senate and House bills cite a FTT necessary to pay back TARP losses. The U.S. administration's bank-fee plan provides another preferred road map for paying back estimated remaining TARP losses. Plus, TARP recipients, including the banks and even General Motors, now have announced plans to fully repay TARP too.

There are other problems brewing for current Congressional transaction tax bills and the administration's bank fee plans. Attorneys for Wall Street claim the bank fee is a tax and it's punitive against Wall Street selectively. Taxation for a small niche is unconstitutional. Senator Hatch said on Jan. 26 the health care bills are unconstitutional because the federal government requires citizens to purchase health insurance (and unconstitutional based on the other special deals that were made as well). In light of the recent ground-breaking Supreme Court victory for corporations on the first amendment (advertising rights), I expect more constitutional threats against the financial-transaction tax and the bank fee. I think the administration will win the bank fee, as it’s not a tax in my view. But think about how the Congressional bills are titled. Let Wall Street (a tax) pay for Main Street. That's unconstitutional in my view.

In my view, we're winning the financial-transaction tax fight.

One other threat on the horizon is that celebrities are expected to do promos for the financial transaction tax — as a global tax to fund social causes — for Oxfam International. I already wrote a blog on this to tackle these celebrities and this approach. I'm waiting to see it happen before I launch these thoughts. If you're interested, I can share this with you.

The Scott Brown MA Senate victory changes things. It weakens progressives further as the President may feel he needs to move (or head-fake) to the center. Some Democrats think the President should move back toward his progressive base instead. Even if the President does, there aren't enough votes in the Senate to pass a FTT bill. The President and his chief-of-staff Emmanuel chided Rep. DeFazio in late fall over his incessant pushing for the FTT.

The President is taking the lead on tax changes in his budget due Feb. 1, and he wants the bank fee and Volcker rule over any other choices. The President’s team knows full well that banker bonuses and other selective taxation against Wall Street can be challenged on constitutional grounds. Rep. DeFazio is a big loser here!

Update: This same journalist sent follow up questions after the President's State of the Union address.

Bob -
A follow-up question for you. Last night, the President called on the Senate to pass the House jobs bill in his state of the union address. As we've discussed, that bill is financed in part by the transactions tax. Does this increase the odds of a transaction tax succeeding in some form, or would it have to be stripped from the bill if it is to pass the Senate? Your thoughts? Thanks again,

Bob – I misspoke. H.R. 4191, the bill with the transaction tax, is not the one that got approval from the House. Obama was referring to a different bill last night. Sorry for the mistake!

My quick reply -
I thought of the same thing during the speech and I think the financial transaction tax (FTT) will be stripped out of any jobs bill. It's counter-productive and odd to cause traders and others in the financial-services industry to be fired as an unintended (or intended for some) consequence of passing a financial-transaction tax - all for the stated purposes of creating new jobs in a "jobs bill." This is the main point of our Petitions at http://www.rallycongress.com/greentradertax-traders-association1/ .

The President was also very firm in the State of the Union address about 'not having passed one dime of new taxes on the middle class' and this FTT tax would fall mostly on the middle class as concluded by Secretary Geithner. The government's piggy-back seems to be unused and repaid TARP funds and the President's chosen means for paying back TARP is his administration's bank fee plan, not a FTT (financial transaction tax).

Regarding the follow up clarification about HR 4191 - The Senate can work up their own version of a jobs bill and include HR 4191 too I presume.

A colleague says, just to be clear there is no FTT is any jobs bill currently and I highly doubt a FTT will show up in the Senate's jobs bill. If a FTT were going to show up in a jobs bill it would have showed up in the house version. It sounds like any jobs bill that does come about (in the Senate) is going to be scaled down from the ambitious jobs bill put forth by the house.../

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