QuickTake Q&A: Europe’s Tax on Trading Gets a Stay of Execution

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It’s a nightmare scenario for stock exchanges and traders: Voters enraged by austerity measures and banker bonuses provoke their elected leaders into imposing a tax on financial transactions, causing trading volumes to slump, markets in some securities to dry up and traders -- both humans and robots -- to lie idle. Which is why everyone who derives their livelihood from the business of trading will raise a toast if a group of European nations abandon their proposed financial-transaction tax (FTT). The 10 European Union members have pushed back their final decision on the tax to September.

1. What’s happening?

In 2011, the European Commission proposed an EU-wide tax of 0.1 percent for stock and bond transactions and 0.01 percent for derivatives. In 2012, the U.K. and a few others prevented the FTT from applying across the EU, forcing the tax’s biggest fans -- France and Germany -- to press on with a levy that would only apply in 11 countries. Under EU rules, at least nine states must be on board for the tax plan to proceed. Estonia pulled out last year, leaving just 10 countries -- Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain -- still talking. They have still to agree on the right tax rates for different securities.

2. Why do some Europeans want an FTT?

It’s revenge for being forced to bail out the region’s banks in the aftermath of the 2008 financial crisis. Royal Bank of Scotland Group Plc was the largest bank rescue anywhere in the world. There’s also the argument that a tax would stop unnecessary transactions from clogging up markets.

3. Who else has or might impose a financial-transaction tax?

France and Italy, not willing to wait for a wider EU deal, have introduced their own transaction taxes. Countries including the U.K. levy stamp duty on share trades but grant generous exemptions for institutional investors. Different FTTs have been set up in Brazil, South Korea and India, according to Columbia University economist Stephany Griffith-Jones. China has considered a tax on foreign-exchange transactions. In the U.S., Bernie Sanders has proposed an FTT as part of his seemingly unsuccessful campaign for the Democratic Party’s presidential nomination. State lawmakers in Illinois have proposed charging $1 or $2 per contract on every trade, a suggestion that provoked Terry Duffy, the executive chairman of futures exchange operator CME Group Inc., to threaten to leave the state.

4. How did we get here?

James Tobin, a Keynesian economist, proposed a tax on all foreign-exchange transactions as early as 1972. The levy, which became known as the Tobin tax, was intended not to raise revenue for governments, but to reduce volatility in markets. Modern critics of FTT argue that it does the opposite: By making it more expensive for market makers to trade tiny changes in asset prices, FTTs reduce liquidity.

5. What’s going to happen?

Belgium and Slovenia are already wavering. If the group of nations falls to eight, work on the tax will have to be halted under EU rules. Austria’s finance minister, who is overseeing the design of the proposed FTT, says there must be a final decision in September.

The Reference Shelf

  • A Bloomberg QuickTake explainer on Europe’s MiFID II rules on financial transactions.
  • A Bloomberg Gadfly column on China’s plan to introduce a Tobin tax on yuan trading.
  • A Bloomberg View editorial on the risks of an FTT in Europe.

— With assistance by Brian Louis

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