FTT faces stiff opposition from the US

NEW YORK | José Manuel Durao Barroso’s proposal for a financial transaction tax (FTT) to help repair public balance sheets could raise around €57bn per year.

 “In the last three years, member states have granted aid and provided guarantees of €4.6tn to the financial sector. It is time for the financial sector to make a contribution back to society,” he said. “It is not only financial institutions who should pay a fair share. We cannot afford to turn a blind eye to tax evaders.”

Yet it has raised fierce criticism from the US.

Treasury Secretary Timothy F. Geithner said this month that an FTT could create “frictions” that would worsen the impact of a crisis without offering a protective reduction in volatility or risk-taking. Needless to say that US analysts are not thrilled by it either. There is certainly going to be a lot of talk back and forth but here are some of the main comments for our readers:

CNBC’s Senior Editor John Carney says:

“Financial markets are great at creating substitute products to avoid regulations. And that’s likely going to be exactly what will happen if Europe gets serious about its financial transaction tax. The tax will apply to stocks, bonds and derivatives. But it won’t apply to currency trading, apparently because EU rules about the free flow of capital prohibit taxing currency trades.”

According to Tim Worstall (Forbes), the FTT will never work:

“If the tax is brought in we’ll just see all the speculation moving over to synthetics which include FX. And the tax will raise virtually nothing. Just as the current FTT on stocks in London raises not all that much as the speculation is done by contracts for differences, which aren’t subject to the tax”.

Is the EU tax going to hit banks? Could things change if the FTT gets acceptance in the EU? asked one of CNBC’s anchors to Rich Repetto, Sandler O’Neill’s Senior Analyst.

“We’ll see if prices go up or not and what impact it has on the US, Repetto answered. In the end it’s going to be a guess but it’s going to be a negative guess. It doesn’t make a lot of sense to me. There is a log window before this gets imposed. This is a directive coming from the European Commission. If it was a regulation it would be imposed directly. I still think it’s unlikely but the risk is going up given the issues over in Europe.

For those who seem to panic in case that business might migrate to more favourable tax jurisdictions outside the EU, John Plender’s op-ed at Financial Times has a point:

“A reduction in financial trading volumes might anyway be no bad thing. The huge increase in bank balance sheets over the past two decades is primarily the result of the growth of trading between financial institutions, as opposed to lending to businesses and households. The social utility of much of this activity has been rightly questioned and trade in structured products has, as we know, been a systemic catastrophe.”