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Push-back Grows Against the FTT and Its Cascade

June 6, 2013

A financial transaction tax goes into effect in some parts of the EU on January 1, 2014: unless, that is, the Powers that Be can prevent it.  That would be … the same powers that have brought it this close to implementation.

The proposal is for a levy of 0.1% on stock and bond trades and a level of 0.01% on trades in derivatives.  That may seem small but, as Clifford Chance observed in a briefing note in February 2013, the “cascading” design of the tax, the way it would apply several times within a single transaction process, will mean that if implemented as at present designed the “effective rate will be considerably higher than the headline rates.”

The FTT will apply against the vendor of a financial instrument, if that vendor falls within a broad definition of a financial institution, and it will apply against the broker, the clearing member on the sell side, the other clearing member (on the buy side) and the ultimate buyer, for example a hedge fund.

Those are six parties paying that 0.1% tax, without any netting out amongst them. Further, only the ultimate buyer and seller in the chain get away with only paying it once. The four intermediary parties will each pay it twice, as the instrument arrives and as it leaves their virtual hands.  Thus, the tax that is on its face set at 10 basis points ends up effectively taking a full percentage point out of this transaction.

Europe’s ruling circles are showing signs of buyers’ remorse.

No Revenue

Christian Noyer, a member of the Governing Council of the ECB, expressed his own view on Tuesday, May 28. “The analyses we’ve done show that the project, as it has been prepared by the commission, will first of all raise nothing at all, there’ll be no revenue,” he said.

According to earlier forecasts, the FTT was supposed to raise between €30 and €35 billion. So the prospective return has gone from €35 billion to zero? It is enough to lead one to suspect that some very step Laffer-curve-style drop off is involved.

But it isn’t the Laffer curve exactly. The Laffer curve is the geometrical illustration of the idea that some taxes, by hurting productivity, can in turn reduce what can be collected from those no-longer-so productive private earners. In this case the problem is more immediate. With this bill, the treasuries of the nations of Europe are effectively taxing themselves, and taking away from themselves with one hand what they are giving themselves with another.

Criticism of the FTT is hardly novel and we’ve reported on it before at AllAboutAlpha.  But the latest grumblings are intriguing. Noyer’s statement came a month after someone had leaked an internal EC memo on the subject to the “Open Europe” blog. (We should mention that Open Europe has its own agenda; it’s a think tank with offices in both Brussels and London that advocates what its mission statement calls a “slimmed-down, outward-looking EU.”)

The memo leaked to Open Europe, officially called “Room Document #4,” arose out of discussions among civil servants from EU member states. It didn’t reflect any official position of any of the governments involved, but as the Open Europe team put it, the memo contains “revealing stuff” illustrating that even countries supportive of the tax in public have “a whole host of concerns” behind closed doors.

Pointed Question

The leaked memo asked a pointed question, whether the tax in the form planned “would interact with the cost of national debt and whether at the overall  level of the [11 member states] the negative effect of the increase of the cost of national debts could be counterbalanced by the revenues of the [financial transaction tax]. “

The authors of Room Document #4 were evidently concerned about the consequence of such a tax for “the repo operations on sovereign bonds markets.” After all, companies and member states “need to manage properly their cash in a secure environment” and that involves the use of a repo market where more than two-thirds of operations have a maturity shorter than three days.

The latest news is a Reuters report, relying on anonymous sources, that the EC is now working on a scaled-back form of the FTT. The tax on a stock or bond trade in particular might be reduced by 90%, to 0.01 percent of the value of the deal. Also, the tax may be phased in: applying at first (next year) only to stock, applying two years later to bonds. Derivatives might be kept out of the picture for some further period.

Maybe the arrival of the FTT will eventually come to seem a bit like the arrival of a new model BlackBerry: always about to happen, never quite happening. There could be worse outcomes.