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Effects of a Financial Transaction Tax

Financial Transaction Taxes are Historically Harmful and Unsuccessful

“A tax ostensibly aimed at Wall Street would ultimately be detrimental to Main Street.”
Vanguard, representing more than 20 million investors

Our Position on Financial Transaction Taxes

What People are Saying About Financial Transaction Taxes

Studies and Articles About Financial Transaction Taxes

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All Investors Affected

A Financial Transaction Tax (FTT) will hurt all investors because it will directly affect everyone who has a portion of their retirement savings or other assets, in the financial market. When investments are reallocated to reflect an investor’s changing risk profile, need for a redemption to cover expenses or rebalancing to keep an investment strategy on track, the tax will apply. That is money that could be compounding to grow assets. And gains are already taxed so this could be seen as a way to tax losing stock trades as well. It’s a bad deal for investors.

A Financial Transaction Tax Would Weaken the Market

Any tax on transactions will add friction that threatens our market, which is the world’s best engine of capital formation, economic growth and job creation. History has shown a transaction tax drives trading away from the country imposing it, therefore reducing the potential revenue from trading activity such as capital gains taxes, while shipping well-paying, and highly taxed, jobs and companies out of the country.

In March 2013, the Italian government imposed an FTT on stocks of corporations with a market capitalization above 500 million euros. The result, as observed in a study published in August 2016 by the European Central Bank, has been “a reduction in liquidity for the stocks hit by the reform.” And increased “volatility of the ‘treated’ stocks.” In other words, the stock became more expensive and their prices less stable.

When Sweden began taxing financial transactions in the 1980s, bond trading fell by 85% and futures trading fell by 98%. By 1990, more than 50% of all Swedish trading moved to London. The tax was declared a failure and repealed in 1991. Recently, Sweden’s Finance Minister Anders Borg quipped “between 90%-99% of traders in bonds, equities and derivatives moved out of Stockholm to London” because of that FTT.

After one-third of the trading in German public companies moved to London and trading in German bonds sank as much as 50 percent, Germany abolished its FTT in 1991. In Italy, a FTT caused trading in Italian stocks to fall by 34.2% within two years of the introduction of the tax according to research from Credit Suisse.

It Doesn’t Raise the Revenue Expected

In Italy, an FTT imposed in 2012 has raised just €159 million of a targeted €1 billion. France, which introduced its FTT a year later, initially predicted €1.5 billion annually in revenue, but has yet to raise even half that much so far. Both countries may see the same results Sweden did when it instituted its FTT. Revenues on bonds, for example, were predicted to be SEK 1.5 billion per year but the average was closer to SEK 50 million.

A More Targeted FTT Will Likely Also Backfire

A variation of the transaction tax proposed is a levy on “excessive levels of order cancellations.” However, a tax on authentic market making efforts will limit an inexpensive and effective way for investors to determine a fair price. The ability to negotiate prices freely has helped limit trading risks and thus made the costs to trade very low.  In fact, a study by professors Jesse Blocher, Ricky Alyn Cooper, Jonathan Seddon and Ben Van Vliet finds that “the only thing occurring during high levels of cancellation activity is HFT firms seeking the correct price level. This is good for the market. It means that HFT firms process information and help improve price discovery without the need for intermediate executions.”

In addition, defining how much legitimate order cancelling is “excessive” will be difficult and dependent on such factors as the complexity of the stock (some ETFs have thousands of underlying constituents) and the tradability of the stock (some stocks trade sporadically and some very often). Setting an improper limit will hinder competition among HFT intermediaries and raise costs for investors.

It’s a “Speculators Tax” That does not Target Speculators

One thing FTT proposals have in common is its positioning as a punitive measure against “Wall Street speculators” who fueled the financial crisis of 2008 that required a taxpayer-funded bailout. But high frequency traders had nothing to do with designing the over-leveraged bank positions that caused the crisis.

It Can Happen Here

Although some dismiss a financial transaction tax as an idea that has been discussed and dismissed many times, the same was said in Europe, where 10 EU countries are poised on the brink of instituting an FTT. In the U.S., all three Democratic presidential candidates have financial transaction tax proposals. This is of particular interest since, as The Wall Street Journal points out “each of the past three presidents ran in part on a tax plan and each got much of it implemented by the end of his first term.”

Conclusion

In short, an FTT has proven to drive trading to other countries, fall short of revenue expectations, sharply depress trading volumes and increase investor’s costs to trade. Collectively it would be an economic disaster for America.

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What Experts are Saying About Financial Transaction Taxes:

“High-frequency trading plays a critical role. When you put a tax on transactions, you risk damaging liquidity. As mutual fund investors we rely on having liquidity,” he added. “A drop in liquidity is bad for fund shareholders.”
– Tim Buckley, Chief Investment Officer, Vanguard Group

“Quite frankly, an FTT is a terrible idea.  It would harm all investors, especially middle-income American workers saving for retirement.  We have yet to see a FTT proposal that would not hurt Main Street nor weaken our capital markets.”
Investment Company Institute, a trade group representing 90 million investors in US mutual funds

“The fundamental problem with FTTs is that they are distortionary; for example, by driving down stock prices, they make raising capital more expensive for firms. In the long run, this lowers labor productivity and wage levels.”
Kenneth Rogoff, Professor of economics and public policy at Harvard University and past chief economist of the International Monetary Fund from 2001-03

“Seemingly small changes such as a financial transactions tax can cause considerable damage far from Wall Street, harming both investors and American businesses and impeding job recovery and growth.”
Professors Charles Jones and Erik Sirri, in a paper for the U.S. Chamber of Commerce

“The most troubling outcome (of a financial transaction tax) 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.”
Bart Chilton, Former CFTC Commissioner

“Politicians think of this (financial transaction tax) as a tax on the guys that caused the financial crisis.  It’s a tax on investors.”
Keith Lawson, senior counsel at the Investment Company Institute

“(Financial transaction taxes) wind up being paid for by the mom-and-pop investors at the end of the day.”
James J. Angel, Associate Professor of Finance, Georgetown University

“We found a significant increase in the bid-ask spread.  There is also evidence of an increase in the volatility of the taxed stocks.”
European Central Bank study on the Italian Financial Transaction Tax

“The evidence from Europe over the past few years suggests a financial transaction tax in the UK would be one of the most catastrophic regulations ever to hit the financial sector.”
Ben Wright, Group Business Editor, The Telegraph

“…highly risky and costly to all investors to introduce an FTT of any design.”
Jim Toes, Security Traders Association President and CEO

“There are few taxes that are as damaging and counter-productive as transaction taxes.  Even before Adam Smith, all economists understood that economic progress is generated by trade: it leads to the division of labour, the division of knowledge and the creation of wealth. Transaction taxes … reduce trade and economic exchanges, and hence slow down economic improvements.”
Allister Heath, Deputy director of content and deputy editor at The Telegraph

“A tax which would damage savings, reduce liquidity and cut economic growth whilst being unlikely to raise much revenue anyway just does not seem worth it.”
Adam Memon, Head of Economic Research at the Centre for Policy Studies

“An FTT affects the economy … that over the long term it actually reduces, not increases, tax revenue.”
Tim Worstall, Forbes.com

“New life for a bad idea”
The Economist, regarding revived financial transaction tax discussions among the European Union

“… an FTT will actually produce lower government revenue due to falling profits in the financial industry. And that benefits precisely no one.”
Professor Moorad Choudhry, Head of Business Treasury, Global Banking & Markets, Royal Bank of Scotland

“Hillary Rodham Clinton has now followed Bernie Sanders and Martin O’Malley in calling for a tax on the traders who, they complain, use their high-speed computers and expensive data lines to pick the pockets of ordinary investors. The odd thing about all this concern is that most of the investors who are actually facing off against the high-frequency traders — often on behalf of retirement savers — don’t see this as anything like the most costly problem they are facing, even in the arcane realm of trading mechanics.”
The New York Times

“An FTT will create unintended investment incentives and undermine sound asset management principles such as diversification, proper hedging and efficient execution. Perversely, as a result of an FTT, active portfolios will be forced to take higher levels of risk and/or invest to a greater extent in derivatives in order to deliver the same level of return to clients. It will also reduce market liquidity and increase volatility, further hurting investment performance for pensioners and savers.”
BlackRock

“A FTT at the rates being proposed and adopted elsewhere would discourage all trading, not just speculation and rent seeking. It appears as likely to increase market volatility as to curb it. It would create new distortions among asset classes an across industries. As a tax on gross rather than net activity, and as an input tax that is not creditable and thus cascades, the FTT clearly can most optimistically be considered a second-best solution.”
Tax Policy Center

“Empirical evidence provides little indication that a transaction tax would reduce volatility. In fact, a number of research studies have concluded that higher transaction costs are associated with more, not less, volatility.”
Congressional Budget Office

“Little evidence is found to suggest that an FTT would reduce speculative trading or volatility. In fact, several studies conclude that an FTT increases volatility and bid-ask spreads and decreases trading volume. Furthermore, a number of challenges associated with the design and effectiveness of an FTT could limit the revenues that FTTs are intended to raise. For these reasons, countries considering the imposition of FTTs should be aware of their negative consequences and the challenges involved in implementation.”
Bank of Canada

“However, Italy’s experience shows that while this sort of tax … is effective at reducing trading volumes, it isn’t very good at raising money.”
Assistant Professor Noah Smith, Stony Brook University

“Many developed nations, including the United Kingdom, Germany and Japan have imposed transactions taxes on securities trades, and their experience suggests that the alleged benefits of the tax are likely to be small while the resulting costs and distortions would be large.”
Burton G. Malkiel, author of “A Random Walk Down Wall Street”

“The FTT would negatively impact the real economy and pensioners would bear the costs.”
PensionsEurope, an organization with 24 member associations in 19 EU Member States and 3 other European countries with significant workplace pension systems

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Studies and Articles About Financial Transaction Taxes:

February 2017: European Central Bank Working Paper Series – Financial transaction taxes, market composition, and liquidity
Jean-Edouard Colliard and Peter Hoffmann of the European Central Bank co-author a paper that empirically examines the 2012 introduction of a financial transaction tax (FTT) on equity trading in France. It concluded that the French FTT was to a large extent a disguised tax on savers.  Also, they found “no evidence for the composition effect through which an #FTT is supposed to improve market quality.”

February 20, 2017: Finance Magnates – EU Financial Transaction Tax Shaken as Race for London Jobs Intensifies
Victor Golovtchenko reports London’s bankers have been outspoken about their plans to leave London in light of the Brexit process that is being prepared by the UK government. As they contemplate the move, the European Union is considering a financial transaction tax. Some of the main contenders for a new European financial hub are immune from the risks of a financial transaction tax – Dublin, Copenhagen and Amsterdam. The position of Paris and Frankfurt could be well jeopardized by their support for the tax proposal.

February 17, 2017: Bloomberg – EU Financial-Transaction Tax Said to Hit Roadblock Over Pensions
Alexander Weber and Nikos Chrysoloras report that the 10 European Union countries exploring a financial-transaction tax are struggling to agree on key parts of the plan, casting new doubt on the future of the project.  A task force working on possible exemptions for pension funds has so far failed to come up with a solution that satisfies all nations involved.  A general opt out for pension funds from the tax would have to be extended to insurance companies. Exempting insurance from the levy would mean that the revenue raised is too small to justify it.

February 16, 2017: Study – The impact of the French financial transaction tax on high frequency trading activities and market quality
Researchers Iryna Veryzhenko, Etienne Harb and Wael Louhichi analyze the impact of the French high-frequency trading transaction tax on market quality measured by market liquidity and volatility. It finds that the introduction of cancel order tax reduces only slightly HFT activities, but it significantly affects market liquidity, increases market volatility and deteriorates the market efficiency.

February 16, 2017: Luxemburger Wort – Luxembourg lawmaker calls for clarity as Belgian support for FTT wavers
A report that Deputy Laurent Mosar of Luxembourg’s Christian Social People’s Party has called on Luxembourg’s Ministry of Finance to confirm whether the Benelux countries have a “common position” on the controversial Financial Transaction Tax (FTT).   This was in reaction to news that Belgium and Slovakia were considering withdrawing their support of an FTT, partly over worry that it would have too great an impact on its pension funds and real economy.  The withdrawals would drop EU member participation below 9 countries, the minimum needed for passage of a pan-European FTT.

October 15, 2016: Modern Trader Magazine – Open (political) season on traders
MMI CEO Bill Harts writes an opinion piece questioning why traders in general, and HFT specifically, have become the logical scapegoat for the 2008 crisis. That event was spurred by the widespread collapse of heavily leveraged products whose stellar credit ratings turned out to be wildly inaccurate. HFT produced no such products, was never “too big to fail” and didn’t take a dime of TARP bailout money. But, the idea of stopping harmful 2008-like Wall Street speculation by taxing the act of trading is somehow being accepted as reasonable and overdue.

October 11, 2016: Financial Times – US markets braced for trading tax grab from Democrats
Democratic politicians have proposed a variety of financial transaction tax proposals on trades of stocks, bonds and derivatives. Vanguard, the $3.8tn fund house, has lobbied against transaction taxes, believing that “A tax ostensibly aimed at Wall Street would ultimately be detrimental to Main Street.” Hillary Clinton’s plan is to tax “HFT strategies involving excessive levels of order cancellations.” Bill Harts, CEO of Modern Markets Initiative says that cancelling and replacing orders is important for determining fair prices. If the aim of the proposal is to stop spoofing, that has already been outlawed, he says. “It seems redundant to put a tax on something that’s illegal. People who are spoofing should be subject to prosecution,” he adds.

July 14, 2016: Bloomberg News – Democrats Assail Wall Street with Plan That May Hit Mom and Pop
Democrats are courting progressive-minded Americans by calling for a tax on Wall Street trades. If the party succeeds, the mom-and-pop investors they’re wooing could bear the brunt. The party supports a financial transaction tax but small investors would probably see an increase in the cost to buy and sell, which has never been lower. Tim Buckley, the chief investment officer of Vanguard Group, said taxes on financial transactions can backfire, upsetting a natural part of the market’s ecosystem. “When you put a tax on transactions, you risk damaging liquidity. As mutual fund investors we rely on having liquidity,” he added. “A drop in liquidity is bad for fund shareholders.”

June 16, 2016: Op-Ed in FoxBusiness.com – Financial Transaction Tax: A Failure In The Making
FoxBusiness.com published an opinion piece from former CFTC Commissioner Bart Chilton who writes that the most troubling outcome (of a financial transaction tax) 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.

June 14, 2016: Study – Taxing High Frequency Market Making: Who Pays the Bill?
Professors Katya Malinova, Andreas Park and Ryan Riordan analyze the effect of a message fee imposed on the Canadian stock markets.  It was designed to target high frequency trading to ensure that they pay their fair share of the regulatory surveillance costs of the Investment Industry Regulatory Organization of Canada.  Yet ultimately, all investors faced worse market conditions and thus, arguably, paid the “tax.”

June 6, 2016: Op-Ed in The Guardian – The overselling of financial transaction taxes
Kenneth Rogoff, professor of economics and public policy at Harvard University and chief economist of the International Monetary Fund from 2001-03 writes against a financial transaction tax (FTT).  He concludes that the fundamental problem with FTTs is that they are distortionary; for example, by driving down stock prices, they make raising capital more expensive for firms. In the long run, this lowers labor productivity and wage levels.

May 6, 2016: Study – Phantom Liquidity and High Frequency Quoting
Professors Jesse Blocher, Ricky Alyn Cooper, Jonathan Seddon and Ben Van Vliet find that “the only thing occurring during high levels of cancellation activity is HFT firms seeking the correct price level. This is good for the market. It means that HFT firms process information and help improve price discovery without the need for intermediate executions.”

March 16, 2016: Investment Company Institute’s Letter to U.S. Committee on the Budget
A letter from a trade organization representing more than 90 million investors in U.S. mutual funds that raises “a strong objection to any effort to advance a financial transaction tax (FTT) as part of a House Democratic Budget Alternative.” The letter continues “Quite frankly, an FTT is a terrible idea. It would harm all investors, especially middle-income American workers saving for retirement. We have yet to see a FTT proposal that would not hurt Main Street nor weaken our capital markets.”

February 25, 2016: Study – Financial Transaction Taxes in Theory and Practice
Tax Policy Centers’ Leonard E. Burman, William G. Gale, Sarah Gault, Bryan Kim, James R. Nunns, Steven M. Rosenthal publish a research report exploring issues related to a financial transaction tax (FTT) in the United States.  They trace the history and current practice of the tax in the United States and other countries, review evidence of its impact on financial markets, and explore the key design issues any such tax must address. Ultimately the paper concludes that a FTT can most optimistically be considered a second-best solution.

January 21, 2016: Op-Ed in The Wall Street Journal – The Bernie Sanders Tax Attack on Stock Trades
Burton Malkiel, chief investment officer of Wealthfront and author of the iconic investment book “A Random Walk Down Wall Street,” writes that Senator Bernie Sanders plan to tax stock trades is a “very bad idea in which “all investors would be hurt.” He cites historical precedent to conclude that such a tax would not raise the revenue expected, negatively impact the broad economy and endanger “the pre-eminence of the U.S. capital markets.”

December 31, 2015: Bloomberg News – China and Clinton agree
Bloomberg Reporters Eduard Gismatullin and Sam Mamudi look at the similarities between a plan by Democratic presidential candidate Hillary Clinton to impose a financial transaction tax on unspecified excessive price changes in the stock market and a proposed rule by the Communist-run China Securities Regulatory Commission, which is looking to impose the same restrictions.

December 14, 2015:  MMI CEO Op-Ed in Pensions & Investments: Taxing Teachers 
Pensions & Investments published an opinion piece from MMI CEO Bill Harts on those who will be affected by a financial transaction taxes. It’s not the “Wall Street speculators” politicians are using to rally support for the idea, it’s everyone with a retirement fund.  The California State Teachers’ Retirement System announced it would reallocate more than $20 billion of the equity investments. A Sanders’ tax would have cost hard-working California teachers more than $100 million. That’s money that would have had the potential to compound in value and further grow the asset pool.

December 4, 2015: Study – Negative effects of a Financial Transaction Tax on pension provision
PensionsEurope, an organization with 24 member associations in 19 EU Member States and 3 other European countries with significant workplace pension systems, writes “the FTT is widely known as a tax on financial services. That is a misapprehension – it actually is a tax on savings and retirement incomes. The FTT will ultimately be paid by pension funds’ members and beneficiaries.”

October 14, 2015: Blog – What’s right about a Financial Transaction Tax?
An opinion piece by Jim Toes of Securities Traders Association that says our markets are not perfect, but they are highly competitive and serve individual investors well. It is therefore highly risky and costly to all investors to introduce an FTT of any design.

October 13, 2015: Solution Without a Problem? A Tax on High-Frequency Trading
A New York Times article that reports the odd thing about (concern for HFT and the need to curb it with a tax) is that most of the investors who are actually facing off against the high-frequency traders — often on behalf of retirement savers — don’t see this as anything like the most costly problem they are facing, even in the arcane realm of trading mechanics.

October 8, 2015: Hillary Clinton: Wall Street Should Work for Main Street
An economic platform put forth by Democratic Presidential Candidate Hillary Clinton which calls for several proposals, include a tax on excessive order cancellations.

October 8, 2015: Why Do High-Frequency Traders Cancel So Many Orders?
Bloomberg View Columnist Matt Levine illustrates why a simple stylized market making strategy cancels a lot of its orders without ever executing them because it is a market maker, and it moves its prices to respond to supply and demand.

October 5, 2015: Europe’s Robin Hood Tax Is a Risky Proposal
The Bloomberg Editorial Board takes a position against a European financial transactions tax saying the idea that the tax would be stabilizing for markets or help avert another financial crash sounds appealing, but doesn’t hold up. The tax wouldn’t have much effect on mortgage bonds or complex derivatives, which trade infrequently and which were largely responsible for exacerbating the credit crisis.

September 25, 2015: Blog – Is it Too Easy to Trade?
MMI CEO Bill Harts rebuts an opinion piece by Credit Suisse U.S. Equity Strategist Douglas Cliggott that advocates a financial transaction tax to curb excessive trading. Bill points out that a tax designed to obstruct the efficiency of our markets will also obstruct capital formation, economic growth and job creation.

August 24, 2015: Pensions & Investments Editorial – Tax’s Excessive Expectations
Pension funds and other tax-exempt asset owners, even though they generally don’t pay taxes, would pay this tax like other investors. But even if Congress exempted them from the transaction tax, they could not escape its consequences. They would still bear the brunt of the detrimental market impact of the tax, such as declining liquidity, and they would pay the price indirectly as money managers passed their increased trading costs through to clients.”

August 4, 2015: MMI CEO Op-Ed: Financial Transaction Tax Would Burden Mom and Pop
CNBC.com published an opinion piece from MMI CEO Bill Harts on proposals for a financial transaction tax. The goal is lofty, audacious and of perfect soundbite length: Free college tuition for all, paid for exclusively by a “small” tax on “Wall Street speculators.” But make no mistake, it would have far-reaching effects and touch every investor. That’s because Principal Trading Firms using high frequency trading techniques now account for about half of overall exchange volume and have played an instrumental role in making markets more efficient for investors.

May 2015: Summary of Sen. Sanders’ College for All Act
A proposal put forth by Democratic Presidential Candidate Bernie Sanders to eliminate undergraduate tuition at 4-year public colleges and universities, fully paid for by imposing a Wall Street speculation fee on investment houses, hedge funds, and other speculators of 0.5% on stock trades (50 cents for every $100 worth of stock), a 0.1% fee on bonds, and a 0.005% fee on derivatives.

January 11, 2012: The Heritage Foundation – Financial Transactions Tax Would Hurt the Economy and Kill American Jobs
An essay by David C. John and Curtis S. Dubay that warns it is average investors who would bear the burden of a financial transaction tax when their portfolios fall in value and suffer from damage to the overall economy.

March 16, 2010: Financial Transaction Taxes – Benefits and Costs
A study by Dr. Christopher L. Culp, Senior Advisor at Compass Lexecon, that concludes: (1) The dual goals of FTTs to deter speculation and raise revenue are irreconcilably at odds with one another. (2) FTTs raise the cost of financial transactions often by significant amounts. (3) FTTs likely will have adverse impacts on asset prices and will engender commensurate increases in the cost of capital for many corporations. (4) FTTs likely will divert trading to untaxed jurisdictions and financial markets. (5) FTTs would not necessarily reduce price volatility and, in some instances, can increase price volatility as a result of reduced liquidity. And (6) FTTs are not expected to affect managerial decision making.

March 2010: Examining the Main Street Benefits of our Modern Financial Markets
Professors Charles Jones and Erik Sirri, in a paper commissioned for the U.S. Chamber of Commerce, write that America’s vibrant capital markets are the global gold standard, fueling the financial needs of business from the smallest single-person startup to our largest public companies. Seemingly small changes such as a financial transactions tax can cause considerable damage far from Wall Street, harming both investors and American businesses and impeding job recovery and growth.

December 16, 2009: Paper – HR 4191: Probably Dangerous and Destructive, But Perhaps Merely Useless
AQR Capital Management’s Clifford Asness, Aaron Brown and Michael Mendelson write that the financial transaction tax proposed by Oregon Representative Peter DeFazio and others would likely hit the superfecta of unintended consequences. Little tax is actually collected, stock prices fall, systemic risks increase, liquidity dries up, and, ironically, credit costs to businesses and individuals rise as banks’ balance sheet capacity gets consumed with favorably taxed-transactions.

June 1996: Financial Transaction Taxes: The International Experience and the Lessons for Canada
A study by Marion G. Wrobel writes: the fact that an FTT drove a significant part of Swedish equity trading offshore is very significant for Canada, which, like Sweden, is a relatively small economy with a large and well developed financial market nearby.

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“Numerous studies – including the recently released UK Foresight HFT project – have shown that transaction costs for both retail and institutional traders decreased substantially with the growth of high-frequency trading."

Larry Harris, former sec chief economist

Financial Times, December 27, 2012

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