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Financial Transaction Tax

November 27, 2012

In the wake of the 2010 Flash Crash, which saw the Dow plunge nearly 9% in roughly five minutes, several political and regulatory officials in the United States and Europe called for a “financial transaction tax” (“FTT”)[1] to discourage high frequency trading. While the likelihood of the United States or the European Union implementing a FTT in the near future is extremely low, countries inside the European Union are eyeing a FTT as a means to create tax revenue.

A FTT is an extremely small tax assessed every time an entity engages in a bond, stock, or currency trade, or any other similar transaction. Generally, the tax would amount to a 10-25 cent tax per 100 dollars. Ostensibly, the tax would reduce speculation in financial markets.

The European Union has proposed the idea, but remains nowhere near promulgating or implementing a FTT through an international agreement. Ten countries have expressed support for the proposal, but several – most notably Great Britain[2] – remain vehemently opposed to it. As succinctly noted in the EU proposal, “[T]he principle of harmonised tax on financial transactions will not receive unanimous support within the Council in the foreseeable future.”[3]

On October 12, 2012, several member states proposed “enhanced cooperation” between countries regarding implementing a FTT.[4] Enhanced cooperation is a procedural mechanism to allow a subset of EU members to enact a policy proposal without running afoul of the EU.[5] However, it remains unclear whether FTT proponents plan to adopt the EU Commission proposal as-is or modify it to make the FTT more palatable to skeptical Eurozone countries.

Since implementation on an EU-wide level remains unlikely, some countries inside the European Union are taking action. France recently passed a very limited transaction tax on trading French-issued shares when the issuer’s market capitalization exceeds €1 billion.[6] Italy stated that it plans to pass a FTT, as well, and Spain has been a vocal supporter of an EU-wide FTT.[7]

These recent adoptions can be thought of as these countries dipping their toes in before taking the plunge. France’s FTT exempts market makers, only applies to 110 French companies and is riddled with exemptions for sophisticated investors.[8] Italy has not promulgated its own FTT yet; whether Italy opts for a “soft” FTT or the far more encompassing EU proposal remains to be seen.[9]

But what about the United States? The US is even less likely to pass a FTT. Representatives have introduced a bill implementing some form of a FTT ten times in the past four years; none of them have garnered significant support. Additionally, Congress has queued up a full plate of financial regulation for the time being. Agencies are still struggling to delineate their boundaries and figure out the rules required by a post-Dodd-Frank regulatory environment.

While a FTT would certainly alter investment strategies and capital allocation, high frequency trading strategies should remain viable for the foreseeable future. For planning purposes, it may be prudent to apply France’s FTT to other countries inside the Eurozone to assess the viability of the investor’s strategy in case of a tax shift.

[1] A FTT is also commonly known as a “Tobin tax” after the economist who put forward a contemporary justification for its existence.

[2] Interestingly, Great Britain actually has a transaction tax called the “stamp tax.” Any transfer of a “stock or marketable security” is subject to the tax, subject to certain caveats. See Section 4.7 at

[3] EU Proposed Council Decision: available at

[4] EU Proposed Council Decision: available at

[5] A helpful analogy may be to consider the state/federal dynamic in the United States. On issues where the federal government has not decisively spoken, like gay marriage rights, states are free to enact their own policies to the extent they do not contradict federal law.

[6] See Ernst & Young FTT Implications Report: available at$FILE/FTT_flyer_01.pdf.

[7] See Crowe Horwath: The Expected Italian Financial Transaction Tax: available at; European Voice, Italy and Spain Back Financial Transaction Tax, available at

[8] See Ernst & Young FTT Implications Report: available at$FILE/FTT_flyer_01.pdf.

[9] Compare France’s recent FTT with the EU proposal’s scope. EU Executive Summary of the Impact Assessment of a Financial Transaction Tax, Section 7.1-3: available at