When the head of the U.K.’s FSA, the German Finance Minister and a very formidable former head of the U.S. Federal Reserve all call for something, our ears perk up. This week, we’ve watched with astonishment as a long-pending, academic proposal – a transaction tax on financial deals – gained remarkable traction. Will it happen? So far, we doubt it. But, then again, these days …
The proposal laid before the G-20 by the German Finance Minister and his Foreign Minister colleague recommends a tax of 0.05 percent, which they say would rack up $690 billion. This, they suggest, is chump change because it would account for only 1.45 percent of world GDP. Since they propose it be applied only in G-20 nations, however, the tax’s GDP share would of course rise in affected nations. In any nation where lots of trading is done – U.S. and U.K. anyone? – the tax would take a still bigger bite of GDP. In the German model, the transaction tax would apply to all on- and off-exchange traded equities, bonds and derivatives. To ease the pain – and doubtless political objections – the concept suggests excluding retail investors.
So far, the U.K. is strongly against the FSA’s version of this tax and the Obama Administration has been silent on it. If asked, our guess is that it would strongly object to the tax – at least for now. It hasn’t surfaced on Capitol Hill in a couple of years, meaning that the financial-transaction tax can be side-stepped by the White House and Treasury for the time being. Given the tax’s profit impact – which is of course very procyclical – the industry will likely muster the Administration to its side, at least when debate opens.
Will the idea stay in the U.S. doldrums, allowing already-scarce industry political capital to focus on the talks – all of them – at hand? We doubt it. This idea has far too much populist appeal to stay buried for long in the U.S., especially when someone like Paul Volcker supports it. Congress is now under pay-go rules, which means it needs to find offsetting revenue to pay for spending even as it’s increasingly hard to find premiums or other funding sources that bypass straight-out federal expenditures. So, the next time around THAT an idea surfaces that costs money and involves big financial firms, count on the transaction tax to rear its head. For lots of Democrats, it’s a no-brainer and, these days, there are lots of Democrats holding gavels.