Who Taxes Financial Transactions and Will Others Join?

As governments ponder how best to extract more tax revenue from the wealthy and pay the bill for tackling Covid, the idea of a levy on financial trades is having a moment. Hong Kong increased its financial transaction tax in February, while jurisdictions in the U.S. and Europe debate a similar move. Watching warily are those who would stand to lose out, including market makers and high-frequency traders who make tiny margins from trading millions of positions a day.

1. What are transaction taxes?

Generally speaking, they are levies on sales of stocks (most commonly) or bonds, and can extend even to transfers of derivatives and foreign exchange. Also known as stamp duty, some variant of a transaction levy has long been widely applied to the transfer of real estate, land and patents, among others. In some instances, the charge is only paid by one party in the transaction, for example, the buyer of a stock. James Tobin, a Keynesian economist, proposed a tax on all foreign-exchange transactions in 1972 (it became known as the Tobin tax) not to fill government coffers but to reduce market volatility.

2. Who levies them?

The Center for Economic and Policy Research counts more than three dozen nations with financial transaction taxes. To complicate comparisons, countries have exemptions on who pays. Some examples:

  • Finland charges a 1.6% rate on certain stocks and bonds.
  • France taxes equity trades at 0.3% and high-frequency trading at 0.01%.
  • South Korea plans to cut its stock purchase tax to 0.15% from 0.25% by 2023 while imposing capital gains tax on retail investors with investment income higher than 20 million won ($17,000) a year.
  • In mainland China, stock sellers pay a 0.1% duty, down from 0.3% in 2008.
  • The U.K. charges 0.5% on certain stock transactions, though most hedge funds avoid the fee by trading a financial product known as a contract for difference.

3. What is Hong Kong doing?

For the first time since 1993, city officials will increase the stamp duty imposed on stock trades. The bump -- to 0.13% from 0.10% -- is designed to offset greater spending to help residents weather the pandemic. In the most recent fiscal year, the duty raised HK$33.2 billion ($4.3 billion). The increase will bring in another HK$12 billion from Aug. 1, local media reported.

4. What do supporters of a transaction tax say?

Just look at the money it would raise: A U.S. levy could generate more than $100 billion annually, according to estimates by the Congressional Budget Office. Proponents have argued it’s a fair way for the finance industry to help repair the damage it helped cause during the 2008 global financial crisis. Such taxes give governments another tool to influence trading activity. There’s also the argument that a tax would stop unnecessary transactions from clogging up markets and encourage longer-term investing. Civil groups, economists and politicians rallied after the financial crisis to support introducing transaction taxes as a means to raise money to protect public services and tackle climate change. The popular appeal -- redistributing income from the wealthy -- is apparent in another of the levy’s monikers: a Robin Hood tax.

5. What’s the other side of the argument?

There are more effective ways to tax the wealthy, such as capital gains tax or income tax, says Larry Tabb, head of market structure research for Bloomberg Intelligence. Transaction taxes are indirect and hit everyone, including laborers, pension plans, charities and endowments. By raising costs for market makers and high-frequency traders, transaction taxes would reduce liquidity and make it harder to trade. A tax applied in a particular jurisdiction might simply result in the business moving to another one -- just ask Sweden. Financial jobs would be at risk, with margins for market makers and traders shaved. Analysts at Citigroup Inc. estimate Hong Kong’s plan will raise trading costs by as much as 15% and crimp trading volume.

6. Where else are the taxes under consideration?

The idea of a broad levy on financial transactions has been kicked around by the European Union since 2011 and may gain impetus following the departure from the bloc of the U.K., a leading holdout. Talk of implementing financial transaction taxes in the U.S. was a theme during the 2020 Democrat primaries and was rekindled by lawmakers amid the trading frenzy in GameStop Corp. shares. President Joe Biden has voiced support for a transaction tax. At a state level, New York lawmakers are warming to such a levy on stock trades, which, given the location of Wall Street, would impact a significant percentage of U.S. trading. Neighboring New Jersey is considering a temporary charge on high-speed traders who operate or store their trading systems in the state. The New York Stock Exchange, Nasdaq and Cboe Global Markets have opposed the tax idea, threatening to close their New Jersey data centers and relocate.

The Reference Shelf

  • Bloomberg Opinion writer Lionel Laurent argues that harmonizing corporate tax rates would be more effective than imposing a transaction tax.
  • A 2012 paper by Dorothea Schaefer in the German Institute for Economic Research contends that financial transaction taxes promote financial stability.
  • Transaction taxes could add risk and volatility, according to Bloomberg Intelligence.

©2021 Bloomberg L.P.

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