Securities Transfer Excise Tax: STET, FTT and Robin Hood taxes are back!

The collective Euro Zone is in a state of calamity. Their problems are no doubt causing capital markets around to world to roil from time to time, largely depending on the pronouncements of German Chancellor Angela Merkel. One of the solutions proposed by European leaders to solve the problems of the European financial markets is to institute a new tax-this one on financial transactions.

The proposal is interesting for two reasons. The first is it is not a new proposal. A security transfer excise tax (“STET” or now referred to as financial transfer tax or “FTT”) is not a new idea. The second reason is the proposal demonstrates the mind-set of most policy makers- when in doubt—impose a tax. However, given the political and financial climate in this country, I do not dismiss the concept so easily.

Once over the government’s greed and lust for more money from what ever source, there are supporters who believe imposing a STET will have a beneficial effect on the financial markets by curbing instability introduced by speculation, reducing the diversion of resources into the financial sector from other sectors of the economy, and strengthen the vision of business. The argument goes the efficiency benefits derived from curbing speculation are likely to exceed any costs of reduced liquidity or increased costs of capital coming from directly taxing financial transactions.

A number of countries currently have or have had some form a tax on financial transactions. In the United States, between 1914 and 1965, an excise tax was imposed on the issuance and transfer of stocks at a rate of 0.1 percent of the actual value on the original issue and 0.04 percent of the actual value on subsequent transfers of stock.  An excise tax was also levied at a rate of 0.11 percent of the face value on the original issue of certificates of indebtedness and 0.05 percent of the face value on subsequent transfers.

There were certain exemptions; of course, as there are always exemptions, for obligations of the Federal Government, State and local governments as well as a few others. Transfers to or by a broker, transfers by reason of death or bankruptcy, and certain odd-lot sales were among the exempt transactions.

The taxes were administered through the sale of documentary stamps, complicated and cumbersome for large transactions. All the excise taxes were repealed as part of the Excise Tax Reduction Act of 1965.

The securities market has vastly changed since 1965 with huge daily volume, creation of different varieties of securities, and electronic global trading at a push of a button among them.

 In designing a system there are a number of fundamental questions to ask:

 –     What is the purpose of the tax?

–     What kind of assets and transactions should be subject to the tax?

–     To whom does the tax apply?

–     How are transactions handled where a non-US resident is involved or takes place outside the United States by a U.S. citizen?

–     What exemptions of entities or assets would exist, if any?

–     How is the tax collected, administered and at what rate?

 So, it is clear this is not an easy problem even without addressing the primary issue of what is the purpose of the tax and how it will affect markets, rates of return and efficiency of capital.

However, putting all that aside, a tax could be designed in theory at the very low rate of the value of the securities on the seller at the time of sale, exchange, or transfer of the security and applied to all transactions in the United States and to sales abroad by U.S. citizens, residents, or tax-exempt organizations.

The tax would have to apply no matter the length of the holding period making the tax much more significant for short-term holding periods and transfers.

Generally the STET would have to apply to all equity securities and debt instruments, plus options, futures contracts, and limited partnership interests. For mutual funds and limited partnerships and other pass through entities- the tax would apply to both the trades made by the entity and trades of interests in the entity.

It is apparent the adverse ramifications all this could trigger.

If the tax does not apply to all types of transactions, certain transactions would be favored over others thus making for capital market inefficiencies. Similarly, if the tax does not apply broadly to all traders, some groups will have an artificial advantage over others. The same premise as to the scope of assets subject to tax applies. After all, why should debt be favored anymore than it is now over equity?

Over the past 40 years there has been a number of proposals to reinstate a STET. House Majority Leader Jim Wright was a big proponent and President Bush almost accepted the tax as part of his tax raising budget deal with the Democrats in 1990. I worked to oppose that effort for a client.

 Although it appears the Treasury Department is tepid to cool on STET, Presidential candidate Obama thought it was a great idea. Support in Congress is slim, but there is a credible bill (S.1787) introduced by Senator Tom Harkin (D-Iowa) with two co-sponsors. It is entitled the Wall Street Trading and Speculators Tax Act and would impose a .03% excise tax on the purchase of a security among other things. The unfortunate name practically dooms it. 

There are naturally compelling arguments against a STET.  A transaction tax will run through the entire economy, adversely affecting investors and businesses. The tax is viewed as impeding the efficiency of markets, impairing liquidity, raising costs to issuers, investors, and retirees, and distorting capital flows by favoring one asset class over the another, and most likely moving some trading to other venues. 

The STET or FTT (or as the New York Times called it the “Robin Hood Tax” (which shows their level of sophistication)) is an interesting concept, getting attention now and deserves to be watched. It further shows an appetite to smack down Wall Street even though in my opinion, it will have little impact on street profits but is enticing as a potential source for government to raise more money to callously spend.  

 

Jack. O. Nutter is a partner in the Washington DC firm of Nutter & Harris. Mr. Nutter is former tax counsel to the U.S. Senate Finance Committee. His further comments on tax, economic and political issues can be found at jacknutter.com and can be reached by e-mail at jack.o.nutter@gmail.com

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markets around to world to roil from time to time, largely depending on the pronouncements of German Chancellor Angela Merkel. One of the solutions