A Global European Sales Tax

France and Italy recently enacted separate financial transaction tax schemes that will affect investors and markets far beyond their borders. And now eleven European Union member states including France and Italy have recently pushed through a directive to implement a uniform financial transaction tax across those states.  But as drafted, it appears that those states would not only like to tax transactions taking place within their borders, but around the world and right here in the United States.

The proposal for “enhanced cooperation in the area of financial transaction tax” is specifically designed to be global in its reach, and, as such, it would collect revenue from financial markets and investors around the world. That means a U.S. investor, who had no say in the adoption of this tax, and would receive no benefit from its collection, will be paying into the EU coffers. The formulation of this novel excise tax is both unprecedented and inconsistent with existing norms of international tax law and long-standing treaty commitments.

We recognize and respect the right of the European Union states to enact financial transaction tax laws within their own territories and to enact reasonable rules to prevent circumvention or abuse of those laws, but the need to prevent circumvention must not be a pretext for extraterritoriality.  Notwithstanding the negative implications of a financial transaction tax, this is truly taxation without representation.

While the proponents of the tax argue it will slow down markets or help fill budgetary shortfalls, the real result is a punitive sales tax on investors, including tens of millions of everyday savers, which will slow price discovery, worsen volatility, reduce the rate of return on savings and increase the cost of capital.

Most FTT advocates actually acknowledge that an FTT will cause a sharp drop in trading and will even slow economic growth, but they often fail to take this into account when projecting revenue. Even the EU’s own economists predict a negative long-term impact on EU GDP. Given the past tendency of advocates to overestimate FTT revenue and under-estimate the negative impact on growth, savings, and jobs, it would be unwise to count on the FTT as a fiscal savior.

Stock and financial transaction taxes are not new. Many countries have experimented with similar tax levies in the past with uniformly negative results. For example, trading in the most active stocks on the Stockholm exchange eventually fell 60 percent when Sweden imposed its stock transaction tax in 1986.

When the French moved forward with an FTT late last year, the result was far from positive. Predictably, share trading on the French stock exchange dropped significantly in just the first months. And trading in French ADRs (American Depository Receipt) in all US markets dropped 31 percent in the immediate aftermath of the tax’s implementation.

Global markets remain fragile, with many economies experiencing historic levels of unemployment and unusually slow recoveries. Indeed, the European Commission just recently estimated that the Eurozone will contract 0.3% in 2013.  This is hardly a time to experiment with policies that experience tells us will impede growth, fragment markets, increase market volatility, harm savings and encourage uneconomic tax-motivated decision making.

Kenneth E. Bentsen, Jr.
Acting President & CEO