Why Treasury’s Opposition To Europe’s Transactions Tax Is Misguided

The European Union is working on rolling out a financial transactions tax, a tiny tax on stock trades. The benefits of such a tax are substantial: it can raise significant amounts of revenue without bothering most investors and it can slow down the high-frequency trading that has brought huge amounts of volatility into markets.

Some Democratic lawmakers have been making a push to implement a transactions tax here. But in an email to the Wall Street Journal, the Treasury Department had nothing but harsh words for Europe’s effort:

The U.S. Treasury said it opposes plans by 11 European Union countries to impose a small tax on trades in shares, bonds and derivatives. […]

The potentially broad impact has triggered opposition in the U.S. “We do not support the proposed European financial transaction tax, because it would harm U.S. investors in the U.S. and elsewhere who have purchased affected securities,” a Treasury spokeswoman said in an email. “Treasury has raised these concerns with European counterparts.”

Treasury has never had much love for a transactions tax, but this outright denunciation is a missed opportunity. Instead of dumping on the tax, Treasury could have seized the chance to say that, if the developed world gets together on a transactions tax, many of the concerns about it undermining an individual nation’s competitiveness will disappear.

As Reuters’ Felix Salmon noted, “financial transactions taxes work pretty well: even the UK, which is implacably opposed to the European tax and which won’t ever join such a scheme, levies a surprisingly large 0.5% tax whenever anybody — anywhere in the world — trades a UK stock. And yet, somehow, London remains the first choice for international companies looking for a place to list their shares.”

There is little reason to expect that the U.S. experience would be substantially different, as New York would still have all the attraction for the financial industry that it does today, even with a transactions tax. And most investors would barely notice the miniscule tax, as they don’t engage in enough trading to rack up a substantial bill. In the meantime, the U.S. would raise revenue from a sector that can afford it, with little economic effect.