JPMorgan and the London Whale: Should we tax securities investments?
Now that a once-obscure J.P. Morgan Chase derivatives trader named Bruno Iksil has become infamous as the London Whale, I suppose it is time聽to ask whether what he does should be subject to new taxes.
The question predated Mr. Iksil鈥檚 misadventures, of course. Ever since the U.S. financial crash of 2008 and the beginnings of the pending Euro-zone financial collapse, governments have been debating whether securities聽transactions should be subject to a new tax.
Such a聽levy could, in theory, accomplish at least three goals: It could raise revenue for countries under great fiscal stress, assure that the financial sector (which聽often avoids tax) pays a 鈥渇air and substantial鈥� share of taxes, and discourage bad behavior and thus stabilize markets.
These last two aims are especially important since the cost to governments of bailing out stupid (at least) financial institutions has run into hundreds of billions of dollars over the past four years.
Of course, such a tax could also have damaging unintended consequences that would damage financial markets. 聽
If they should be taxed,聽the really interesting question is: How? There are at least three major alternatives鈥攁nd lots of variations on the theme.
The first option is a financial transactions tax (FTT) that imposes a levy on each trade without regard to profits or losses.聽 Thus, if I buy a share of stock for $10 and then sell the same share for $10, I鈥檇 be taxed on the value of both transactions even though I made no money. The European Commission recently proposed such a tax for the EU, and Sen. Tom Harkin (D-IA) and Rep. Peter DeFazio (D-OR) proposed one in the U.S.
The second option is a financial activities tax (known, sadly, as a FAT). This tax, which has been proposed by the International Monetary Fund staff, is levied only on net proceeds of securities transactions. You could think of it as a Value-Added Tax on financial transactions鈥攚hich are normally exempt from the VAT.
Just to make things even more interesting, some versions聽of the FAT would not tax all profits, only those that are very high. They聽might, for instance, have taxed some of the big derivatives bets that Wall Street placed in the early 2000s.
The third idea, which has been proposed by the Obama Administration, is a direct tax on the balance sheets of large,聽financial institutions. The idea is that a firm should pay a tax that reflects its contribution to systemic risk鈥攁nd, thus, its likelihood of needing a taxpayer聽bailout.
The differences between even the FAT and FTT can be pretty arcane. As New York University law professor Dan Shaviro, who has written a terrific for Tax Notes on the subject, says, 鈥淚t is difficult to imagine a question that initially sounds as tedious as whether we should tax financial transactions or activities.鈥�
But this choice is a very big deal. For instance, taxing every transaction could generate an enormous amount of money, even with a very low rate. A 0.01 percent tax would collect $16 billion Euros annually and the Harkin-DeFazio 0.03 percent tax could raise $350 billion over 9 years. Because the FAT taxes only profits, it would take a much higher rate to generate as much revenue.
And there are聽other questions: What is a financial transaction? How, in fact, would those derivatives that created so much unpleasantness for J.P Morgan in recent days, be taxed?
Then, there is聽tax competition. Even if all the world鈥檚 major developed countries adopted the levy, what would prevent financial markets from decamping to some warm Caribbean island to avoid the tax? 聽聽
If you鈥檇 like some answers to these timely questions, the Tax Policy Center is sponsoring聽a panel on the subject on Friday. 聽Panelists include Dan Shaviro, IMF Deputy Director for Fiscal Affairs Michael Keen, Tax Notes contributing editor Lee Sheppard, and AFL-CIO special counsel Damon Silvers. TPC visiting fellow Steve Rosenthal will moderate.
