Financial Transaction Tax: A Failure In The Making

Negative consequences of the 2008 financial collapse continue to reverberate throughout the nation. There’s deep-rooted resentment and mistrust of those in the financial sector and politicians. As evidenced by the anti-establishment tidal waves thrashing both U.S. presidential party primaries, millions of people passionately seek retribution for what occurred—for the loss of jobs, loss of homes, the loss of retirement savings and pensions.

While they have not yet discerned how best to channel the “rage against their own machine”, politicians are throwing responsive darts at the public’s generalized irk and ire at the financial sector. Elect an "outsider". Put more people in the slammer. Break up the big banks. Slow down technology. And, the biggest tomato pie being hurled from the policymaking crowd: impose a financial transaction tax (FTT) on Wall Street (or LaSalle Street in Chicago). It is even being served up a la mode: fund free college with the revenues. Like state lotteries, you know, you will love it! Not.

Seemingly simple solutions are what I warned readers about in my consumer protection book about fraud. If it sounds too good to be true, it probably is. Ditto with the FTT. The most troubling outcome could be that consumers, mom and pop investors, pensioners and end users (those actually using markets to hedge their legitimate business risk) wind up being victims of such a mindless—perhaps momentary lapse of reasoned—policy.

More debates and discussions have taken place in the US in the last several months regarding a FTT than during the previous three decades. In its own lapse of reason, a major US newspaper editorial board endorsed a FTT, even as they brushed beneath the policy rug a horrible history of what has taken place when other nations imposed a FTT.

Here's what has actually transpired. Nations, sovereign entities and geographies that have instituted a FTT have lost trading revenue and jobs as their markets migrate to FTT-free zones. With less trading, there are correspondingly less—you guessed it—revenues. There are no magic revenue beans which equates to no additional bucket-o-cash; ergo no free college. If that weren’t enough, jobs and economic activity related to trading were lost to other jurisdictions. The third tragic lesson for those in search of seemingly “easy revenue” hits: the trading won’t be coming back. Gone, gone, the damage done.

The circumstances described aren’t pipe theory, but statements of fact. These are the lessons of  Sweden, Switzerland, Japan and Brazil. Even in the European Union (EU), where many of the 28 member states are experiencing severe budget shortfalls, the FTT is failing badly. EU regulators, I know from many conversations I’ve had with them, deplore and dread the idea of a FTT. They are highly uneasy and painfully aware that a EU FTT would drive trading and much needed revenue to the U.S. or Asia. We have the best markets in the world, so why would US-based politicians be eager to so complicity gift our exchanges and trading to Asia

Markets today are global and operate 24-7-365. It really doesn't matter to traders where the trading venues (the exchanges) are physically housed. They, the traders, just want to pay the least for their trades. As additional overhead, cost, and regulatory burden, a FTT promptly motivates them to trade someplace else.

However, let's suspend reality for a moment. Assume exchanges decided to remain in the higher tax jurisdiction (despite their best interests) and the traders embrace paying more for transactions (despite their best interest). Then what happens? Investor profits take the blows, repeatedly. Traders, banks and end users, average mom and pop investors, pension funds of firemen, police, teachers and union workers must buy and sell many times to eke out value from markets. They would get hit each and every time by the FTT. 

Ironically, the most vulnerable victims of the FTT include the frustrated and angry folks who believe they simply are punishing the financial sector as penance for previous deeds.

All of this says nothing about the importance to all traders—large and small—of having deep, liquid markets where free and fair price discovery can take place. We should all want lots of trading because price discovery (fairer pricing) is better. That’s great for all investors and consumers alike.

I’m not amongst those believe unfettered free markets are the answer to the world’s woes. But, I surely understand how good and bad public policies are made and how natural it is for well-intentioned policymakers to respond hastily to angry stadium and town hall meeting crowds. Pols like to throw a little red meat out for the voters (in this case a FTT) lest they find themselves on the receiving end of tomatoes, or worse yet, on the election year dinner plate.  

Unfortunately, this appears to be what is occurring for many who support some form or version of an FTT, including Senator Bernie Sanders and Senator Hillary Clinton. Donald Trump has yet to disclose a formal position.  Hasty appeasement and so-called “populist offsets” bear huge risk and long-term regret, as history reveals. A FTT is loaded with unintended consequences and should be resoundingly rejected.  

Bart Chilton is former CFTC Commissioner and is currently a Senior Policy Advisor at the global business law firm DLA Piper and the author of Ponzimonium: How Scam Artists Are Ripping Off America. He can be reached at bartchilton@bartchilton.com.