John O’Donnell and Ilona Wissenbach of Reuters indicated on May 30 that European Union countries were considering scaling back the application of the proposed FTT (financial transaction tax). The charge could also be lowered from the proposed 0.1 percent to 0.01 percent of the value of a proposed share deal. Under this scenario, expected revenues will only be approximately 3.5 billion euros. Rollout of the tax to other instruments is also being delayed, with the FTT applying to shares in 2014 and to bonds up to 2 years later. According to Citi Research analysts, change is unlikely for the current FTT outlook given the German September 22 elections. Both French and German governments favor imposition of the tax.

Financial Transaction Tax FTT

FTT Could Create Problems

Some members of the ECB governing council and main debt agencies have criticized the proposal and the Netherlands is opposed to it. Critics have highlighted that the FTT could create problems for the financial system in a time when costs of deleveraging need to be minimized. There are also businesses opposing the FTT, such as Siemens. The claim is that the tax will damage their profits. Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE) has become a large player in financial trading through Siemens Financial Services.

Proponents of the tax claim that only day trading or excessive trading will be substantially affected, as the tax is charged per transaction. The tax can help reduce volatility and improve asset price stability. Businesses in turn will spend less in protecting against value volatility and capital may be freed up for investment.

The financial transaction tax has received support from business leaders such as Warren Buffet, Arielle de Rothschild, Managing Director Rothschild Group, and Charles Ewald, former Vice President Goldman Sachs Group, Inc. (NYSE:GS). They all agree that shareholders, managers, and regulators are focused on short-term considerations at the expense of considering a sustainable, long term outlook for business and investments. These leaders propose either revised capital gain tax provisions or a tax to discourage excessive trading, like the FTT. Financial leaders also note that the dominance of short-term trading in financial markets and high frequency trading can drain liquidity in stressed markets when it is needed most. Finally, the tax should be applied broadly to financial instruments including stocks, bonds, and derivatives that are traded on exchange or over the counter.

The tax as proposed by the European Commission will apply to trades across the globe. The FTT tax will be levied to any security issued in the eleven countries comprising the European Union.  For example, an Italian bond will be taxed whether is traded in the United Kingdom, United States, or China.