While the tax we are proposing here at the foundation is unlike anything that’s been implemented in the past, more specific taxes on the financial sector are not uncommon and are (or have been) implemented in several countries across the world. The US and various European countries have both used taxes on financial sectors- while the US’s tax is more limited in scope, the EU has a broader use of financial taxes and is looking into expanding these taxes as well. These sorts of taxes offer the benefits of stabilizing the economy and reducing risky financial behavior.
The U.S. had an FTT implemented between 1914- 1965 that was applied to federal stock transactions, and currently uses a securities transfer tax as well to fund the Securities and Exchange Commission. The rate of this tax is fractional and limited enough in scope that the impact is essentially invisible. While the securities transfer tax does show that implementing a tax on financial transactions is feasible in principle, it doesn’t necessarily create an argument for an expanded tax in the financial sector. For this, it’s helpful to look to the EU, where a variety of financial taxes have been implemented in the past half-century.
Several taxes on the financial sector are already in place in Europe, such as bank levies in the UK, and a Financial Activities Tax (FAT) in Italy. The EU is also proposing a more broad-reaching financial tax, but voting on this measure has been postponed indefinitely due to the United Kingdom’s withdrawal from the European Union and resulting instability between member states. The EU’s financial tax emerged as a response to the global financial crash following 2008- the crash was initiated by risky and speculative investing in the banking sector, coupled with a lack of regulation. The intent of a financial tax was primarily to disincentivize this type of behavior in the future.
Although the EU has implemented a comparatively robust financial tax system compared to the US, it still isn’t substantial enough to base a proposal for a more broad-reaching tax on. When large swaths of financial transactions are excluded from the tax, a loophole is created. For example, the EU’s proposed FTT excludes some primary-market transactions (i.e. new stocks). This creates an incentive for investors to substitute their current taxable financial products for other products like newly issued stocks that would not be taxed. Conversely, a flat tax across all financial products like what we are proposing creates less incentive to substitute, as all financial products will be equally taxed.
Taxes on the purchase and sale of financial products are interesting in that they don’t implicitly disincentivize the holding of stocks, bonds, etc. By taxing the flow of money rather than the holding of money, financial taxes incentivize long-term financial holdings and push consumers away from speculative investments that contribute to volatility in the economy. A tax on financial movement at a rate of less than 1% is essentially invisible to the vast majority of Americans, including those that hold investments. By disincentivizing risky financial behavior, a financial tax assists in returning the banking sector to its original function: enabling growth in the rest of the economy.