The Free Press
A plan in Europe to tax stock trading transactions offers a chance for the United States to see how it works and consider implementing the same kind of plan somewhere down the road.
Eleven member countries of the eurozone have gained approval from European Union finance ministers to move ahead with a plan to tax stock trading in an effort to raise revenue and discourage speculation.
The top four economies of the eurozone -- Germany, France, Italy and Spain -- as well as eight others that include Belgium, Greece and Portugal, will implement a plan that could generate 37 billion euros for those countries and some 57 billion ($77 billion U.S.) if applied across the European Union.
European Commission President Jose Manuel argued for the tax saying the governments of Europe have guaranteed or paid directly some 4.6 trillion euros to financial institutions as a result of bailouts, and now it's time for the financial institutions to give back. The U.S. has made similar loans, guarantees and stock purchases to its own financial institutions.
The tax in Europe would include a minimum levy of 0.1 percent on all financial instruments, while derivatives would be taxed at a 0.01 percent rate.
The goal is to raise revenues to fill gaping deficits in the budgets of many countries without further directly taxing consumers. The taxes are also aimed at curbing trading speculation. If speculators see there is now a cost to thousands of speculative trades, they may think twice about their approach.
The idea has long been considered reasonable and legitimate in economics and business. Such taxes are often called "Tobin taxes," named after the Nobel Prize winning economist James Tobin, who first proposed taxing foreign exchange transactions in the 1970s.
The idea has been raised from time to time in the U.S. but has not generated a great deal of enthusiasm. But that sentiment may be changing given how much of the country realized there is a cost to rampant speculation and the failure of large financial institutions engaged in risky deals like credit default swaps.
From an efficiency standpoint, a stock trading tax makes some sense. The volume of stock trading is not likely to decline based on the tax, unlike the impact of a straight sales tax on a consumer good. The tax would be relatively small on a given transaction and not impact overall prices of equities to any great degree.
The costs of the tax would likely be passed along to the large group of players in the financial markets. Financial firms might be loath to add the tax to consumer or big pension funds accounts, given those funds and consumers could seek out competitors more willing to offer their services at lower prices.
The trading tax might indeed quell speculation and create markets more stable to the fundamentals of supply and demand.
It may also provide insurance or revenue to help recover from these large financial institution failures, so at the very least, average taxpayers would not be on the hook again. There is some precedent for this kind of tax in the U.S. Federal Deposit Insurance Corp., fees are assessed to banks and the money goes generally to insure deposits up to $250,000 per account should banks fail.
The U.S. should watch how the stock trading tax plays out in Europe and consider its own options for adopting such a plan.