The debate about Financial Transaction Taxes (FTTs) seems to roll on and on. Italy’s FTT is due to come into force this Friday and two democrats in the US want to introduce an American FTT. Even EU Tax Commissioner Algirdas Semeta says a global tax on financial
transactions eventually should be a reality.
All of this got me thinking about what the real purpose of such a tax is and whether it can ever work in practice. Some regulators have argued that FTTs discourage predatory HFT activity, but the evidence from France (the first country to introduce such
a tax) does not seem to confirm this view. The chart below shows volume in CAC 40 stocks and, at first glance, seems to show that volume fell away dramatically after the introduction of the tax on 1st August 2012.
So did this mean that the HFTers slunk away to lick their wounds? Well actually, no, as the second line in the chart shows that volumes across all other European indices fell away too. So what we were really seeing in France in August 2012 was just part
of a macro phenomenon and nothing to do with the tax at all.
The second argument put forward by politicians is that such a tax is a way to extract recompense from the financial community as a whole. This doesn’t wash either as any sales tax (think VAT, for example) just gets passed down the line until it reaches the
end consumer. So perhaps the real motive is simply a somewhat cynical attempt to introduce a tax that will ride on popular support for 'bank bashing'. The irony, of course, is that it will be you and me that actually pay this tax in our pensions, insurance
premiums and other investments.
As to whether they will work, I have always maintained that in any market participants can move faster than regulators can pass legislation. The introduction of FTTs unilaterally around the globe should prove no exception to this game of regulatory whack-a-mole.