Future of financial transactions tax unclear

Legislation introduced last week that would impose a federal tax on financial transactions may be doomed as a stand-alone bill, but proponents say that it should be included in any broad deficit-reduction proposal

Legislation introduced last week that would impose a federal tax on financial transactions may be doomed as a stand-alone bill, but proponents say that it should be included in any broad deficit-reduction proposal.

Bills written by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., would place a 0.03% levy on financial trades in stocks and bonds at their market value. It also would cover derivatives contracts, options, puts, forward contracts and swaps at their purchase price.

Mr. Harkin acknowledged that its path toward becoming law is likely to be blocked by Republican lawmakers, who resist raising taxes, and by the Obama administration, which reiterated Thursday that President Barack Obama opposes such a tax. He hopes, however, that it will be considered by Congress’ Joint Select Committee on Deficit Reduction, which has until Nov. 23 to make a proposal.

“This certainly ought to be part of the revenue mix that we’re going to have,” Mr. Harkin said at a Capitol Hill press conference last Wednesday.

The companion bills are designed to curb high-frequency trading and force Wall Street — and what the lawmakers call its exorbitantly paid denizens — to contribute a bigger share to the federal budget.

‘SIMPLE PRUDENCE’

“We need the new revenue that would be generated by this tax in order to reduce the deficit and maintain critical investments in education, infrastructure and job creation,” Mr. Harkin said. “This Wall Street tax is a matter of simple prudence, fairness and fiscal sanity.”

One Wall Street professional, however, came close to calling the measure insane.

“You really have to wonder if anyone over there bothered to do the simple math when they were cooking up the scheme to take the Europeans’ lead and propose their very own financial transaction tax for the U.S.,” Adam Sussman, partner and director of research at Tabb Group LLC, said in a statement.

The European Commission is considering a 0.1% transaction tax.

The Democratic lawmakers emphasized that they’re calling for an even lower rate.

“This measure is not likely to impact the decision to engage in productive economic activity,” Mr. Harkin said. “There’s no question that Wall Street can easily bear this modest tax.”

Mr. Sussman asserted that even at 3 basis points, the tax would take a big bite out of the markets. He said that mutual funds and other asset managers would pay about $1.9 billion annually, while exchange-traded funds would be taxed both when they were created and when they were traded.

The legislation’s authors said they are targeting banks and other financial institutions. Under the proposal, a brokerage company that placed an order for a stock or mutual fund would be responsible for paying the transactions tax.

The Securities Industry and Financial Markets Association asserted that the measure would harm financial firms, as well as their clients.

“A financial transactions tax is essentially a sales tax on investors,” Kenneth Bentsen Jr., SIFMA executive vice president for public policy and advocacy, said in a statement. “At a time when we face a slow economic recovery, such a tax will impede the efficiency of markets, and impair depth and liquidity, as well as raise costs to the issuers, pensions and investors who help drive economic growth.”

Financial markets in countries that have adopted a financial transactions tax have suffered asset price decreases, lost businesses to other countries and experienced a loss of liquidity, Mr. Bentsen said.

CROCODILE TEARS?

Mr. Harkin implied that the financial industry is crying crocodile tears.

“To save $3 on $10,000, they’re going to move to another country? I don’t think so,” Mr. Harkin said.

The point is to curb the high-frequency trading that injects volatility into the market and, instead, turn attention back to capital formation, according to Mr. DeFazio.

“They don’t make things,” Mr. DeFazio said of Wall Street. “They don’t feed people. They churn.”

Wall Street should play a larger role in the reconstruction, according to supporters of the bill.

“Sen. Harkin and Rep. DeFazio are showing real leadership in introducing this important legislation that would help the 99%,” Richard Trumka, president of the AFL-CIO, said in a statement.

“It is only fair to ask Wall Street to pay for rebuilding the economy it helped destroy,” added Mr. Trumka, who urged the legislators to raise the tax to 0.1%.

Critics, however, contend that retirees will be hurt, especially when the costs of the tax are passed along in 401(k) fees and other charges.

Mr. DeFazio countered that people saving for retirement will benefit from a market that is more stable after some of the high-frequency trading has been wrung out. The value of their 401(k)s will be more predictable, he said.

“They won’t see them gyrating on a daily basis anymore,” Mr. DeFazio said.

Email Mark Schoeff Jr. [email protected]