France survives the financial transaction tax – so far

This summer, France went ahead and unilaterally launched a financial transaction tax. Sarkozy started it, with plans for a 0.1% levy on the country’s biggest stocks. Hollande doubled it to 0.2%. The reaction from business was predictable.

‘Bets grow on impending French stock market slide’ said one headline. The Spectator explained how “global investors will just skedaddle to other markets where the fiscal regime is less onerous”. London mayor Boris Johnson personally invited French bankers to switch to London: “if your own president does not want the jobs, the opportunities and the economic growth that you generate, we do.” Some went so far as to predict the total collapse of the French finance industry: ‘Au revoir CAC 40′ said one blogger, advising readers to “liquidate your positions while you still can.”

This was always going to be rather overblown, considering that even after the taxes, France is still a cheaper place to trade than London – a levy of 0.2% against London’s stamp duty of 0.5%. There was never going to be an exodus out of the French markets.

This month the government starts collecting the tax, so let’s take a look. Has there been any impact on trading in France? Here’s how the French CAC 40 has performed over the past three months, compared to London’s FTSE in yellow and Germany’s DAX in grey.

The FTT came into force on August 1st, and there clearly hasn’t been a collapse, or a slide, or a mass exodus of traders. It looks pretty steady to me. The CAC 40 above is only the biggest French companies, out of 109 affected in total, so let’s look a little further.

If the French markets have been devastated as some were predicting, you’d think it would be easier to find out about it. But there’s little to find.  An internet search on the French financial tax brings up very little, even if you search in French. Clearly the financial apocalypse failed to materialise.

That doesn’t mean there haven’t been any effects, only that nothing dramatic happened. I can only find two articles examining the effects of the tax. The first suggests that there was a minor slump, and then a full recovery. It also suggests that not all companies have been affected equally – smaller companies have experienced a bigger decline in trades, down around 26% for some. That’s a decline in the number of trades, not the value, and you’d expect to see fewer trades with a transaction tax in place. That article is behind a paywall, and it refers to a Credit Suisse report that I haven’t been able to find online. (If anyone has a link, let me know)

The second article is more concerning. It suggests that the reason why there’s been little news about the tax is that it is being circumvented by the people it was supposed to be targeting. Rather than buying and selling the shares themselves, speculators are using derivatives that allow them to bet on whether share prices will rise or fall without owning them. It’s almost impossible to tax these complex financial instruments, and the companies that create them pay more than the regulators do. They have all the smartest people, and it’s their job to find loopholes.

This was expected too. New rules create new incentives to ‘innovate’, and the details of the tax have been kept open so that it can be reviewed. There are new measures expected in January, and a banking bill in December could make additional tweaks.

It’s too early to tell whether the financial transaction tax is working or not. Three months isn’t long enough, and we need to wait and see what the tax take is at the end of the year before we know how effective it is. Revenue could come in below expectations, showing the tax is too light. Or smaller traders could be bundled out of the market, showing the tax has hit the wrong people. Events in the Eurozone could overtake the markets or there could be another banking crisis, and that would muddy the waters and make it impossible to tell the FTT’s effect from everything else. We shall see.

One thing we do know: France is still here, and so is its financial sector. Those 11 countries discussing a Europe-wide financial transaction tax should proceed with the planning, and continue to watch this space.

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27 Comments on “France survives the financial transaction tax – so far”

  1. henry1941 November 22, 2012 at 1:08 pm #

    The FTT is a sticking plaster on a boil. The right treatment is to lance it, draw the pus and follow up with a course of antibiotic, followed by a change in diet to prevent a recurrance.

    Because it does not address underlying causes, expect avoidance, evasion, unintended consequences and a failure to deal with whatever it was meant to deal with.

    • Jeremy November 22, 2012 at 3:34 pm #

      You’re right, it’s not a solution in itself. But it has a place, alongside more drastic measures to separate retail and investment banking and re-regulating trade. Some of that is happening in the banking bill France should be discussing in December.

      • henry1941 November 22, 2012 at 9:34 pm #

        Where is the principle behind this tax? Financial transactions are a necessary part of wealth production and the functioning of human society. Why punish them with a tax?

        That those involved in proving financial services in turning their profession into an “industry” selling “products” is an aspect of the corruption that has made them parasitic on the real economy instead of facilating it. But the FTT does nothing to address this – it will just encourage these people to use their ingenuity to work round it.

        • Jeremy November 23, 2012 at 9:49 am #

          It’s a way of taxing something which is currently undertaxed. Since it was the banks that caused the financial crisis, it makes sense to raise the funds to fix the mess from them where possible. That makes the FTT a legitimate and sensible idea. And I wouldn’t call a 0.2% levy a punishment.

          It’s not all financial transactions either, that 0.2% is on share purchases.

          There are ways to do this that are harder to work around. Britain’s stamp duty on shares is considered pretty robust.

          • henry1941 November 23, 2012 at 4:04 pm #

            Why should financial transactions be taxed? Why should any transactions be taxed? Where is the principle? And the banks did not cause the crisis. Governments caused the crisis by setting the fiscal framework which made it inevitable. The banks were the agents this time round but bank regulation would have been worked around. This lesson has still not been learned.

        • Matti Kohonen November 26, 2012 at 1:20 pm #

          the principle behind the FTT is that all transactions should be at a level playing field – but banking and many other immaterial transactions are exempt from VAT (and rightly so as such a high rate would not work in a small margin industry). So the FTT and the Financial Activity Tax (FAT) put the banknig and finance sector at an equal footing with other industries. Banking and Finance have a generally low tax contribution also for other reasons (clever avoidance) which the FTT won’t tackle, but it introduces more transparency to the sector by obliging all trades to be settled and cleared (a prequisite to have a taxable base). All in all it’s good for the sector and will likely reduce the risk of a melt down.

  2. spatbord November 22, 2012 at 4:08 pm #

    Apart from transaction taxes being a very bad way to reach the goals they want to reach, the design is pretty damn dumb too. You don’t pay the tax on every transaction, but on the net position at the end of the day. The people they want to target tend to get in and out (multiple times) on the same day, and end with a zero position. So they don’t even pay anything. The only people paying are pension funds and retail investors, the very same people they want to protect from the bad banksters. (and for the same reason the revenue from the tax will disappoint and Hollande will then say how surprised he is by the low revenue and vouch to go even harder after the bankers since obviously they must have come up with devious strategies to avoid his justified tax)

    • Jeremy November 23, 2012 at 9:53 am #

      Yes, I think the design of the tax is rather weak and that revenue won’t come anywhere near the estimates.

      Whether the tax is a bad idea or not in theory, is another question. I’m not sure why people insist that it’s “a bad way to reach goals”. If you mean that it won’t fix an irresponsible financial sector, then sure, it won’t. But is that what it’s supposed to single-handedly achieve? Of course not.

      The point of a financial transaction tax is to raise revenue, at minuscule cost to the banks, which can then help to redress the deficit that was accumulated in protecting the banks in the first place. Seems eminently sensible to me.

      • spatbord November 23, 2012 at 3:46 pm #

        If you want to tax the banks, you should tax the banks. The French government should get the money back from French banks, not from French retail investors, Dutch pension funds, American banks or British proprietary trading firms. Unfortunately, the French banks are only responsible for a small share of share trading in France, so the ones that are paying most are not the target group.

        As for miniscule cost: 0.2% sounds small, but even when you only turn over shares in your portfolio once a year you’re taking a decent chunck out of your performance. That’s on top of the French dividend tax of 33% and any capital gains taxes that have to be paid in whatever tax jurisdiction the shareholder resides.

        As an aside, people tend to gloss over the fact that the government also profited (through taxes) from the big profits that banks made in the years prior to the crisis. I didn’t hear them complaining back then.

  3. AdrianM November 22, 2012 at 10:43 pm #

    Does nothing to address the real problem, France spends more than it steals in taxes.
    Either Cut spending, Default or just steal everything.

    Lets see which one they choose.

    • Jeremy November 23, 2012 at 9:54 am #

      If you equate tax with theft, then obviously you’re not going to support the idea. And I think you’ll find that France is cutting spending.

    • henry1941 November 23, 2012 at 4:04 pm #

      Some taxation is theft. Most present taxation is theft. But not all taxation is theft.

    • Matti Kohonen November 26, 2012 at 1:21 pm #

      taxation is a duty to to society, as Roosevelt said “taxation is the price we pay for civilized society” something to think about in times of crisis.

  4. gfmurphy101 November 23, 2012 at 8:11 pm #

    Reblogged this on gfmurphy101.

  5. Fran Ellerson November 26, 2012 at 10:30 am #

    Your taking money from pensioners retirement funds. A papercut everytime the funds that one is invested in has to move money around to keep the funds operational. That’s a success? It’s more like robbery. You can die with hundreds of papercuts. So can your retirement funds & any growth you hope to achieve.

    • Jeremy November 26, 2012 at 10:55 am #

      A common misconception. Retirement funds don’t tend to speculate. They prefer to hold stocks long term, and build capital through dividends. They’re not greatly disturbed by an FTT. The people who are most affected are the flash traders who bombard the market with thousands of tiny trades by computer. That’s a dubious practice at the best of times.

      If your retirement fund is speculating on the stock market as a core part of its activities, I’d switch pension provider.

      • Fran Ellerson November 26, 2012 at 10:59 am #

        The flash traders should be removed with new laws, not penalties that hit everyone including every pensioner. Why aren’t retirement accounts excluded from the tax? What purpose is served by taxing retirement accounts at all? It’s wrong. say what you will but it is wrong. period.

      • spatbord November 26, 2012 at 11:13 am #

        Jeremy, here you really miss the boat. Pension funds don’t hold stocks long-term. According to this paper (http://www.qass.org.uk/2011-May_Brunel-conference/Rubbaniy.pdf) the annual turnover of Dutch pension funds is over 100%. Not exactly long term capital building through dividends. They are very disturbed by an FTT (they’re actively lobbying against an FTT in the Netherlands and are the most vocal opponents). The flash traders are not affected (as I said before) since they mostly end the day with a zero position and don’t pay the tax as a result. Apart from that, I disagree with you about that being a dubious practice, but that’s a whole other discussion.

        Also, could you maybe tell me what the difference is between speculating and investing according to you? According to Collins dictionary speculation is “investment involving high risk but also the possibility of high profits”. Can you tell me why it’s high risk if the shares are held for less than a year, but low risk if they are held for, say, five years?

        As an example why I think it’s perfectly rational for a pension fund to trade a lot. Pension fund has a big investment in BP. Then BP goes up 10%, and Total doesn’t. They are both very similar companies, but now BP is a fair bit more expensive than Total. Pension fund switches from BP to Total. You might call it speculation, I call it sensible investing. There is no good reason why this should be taxed, but right now, it is.

      • henry1941 November 26, 2012 at 3:12 pm #

        There is still no justification for the FTT. Speculation, eg tiny trades, is a zero sume game, like betting on horses, dogs and roulette wheels. The government has no moral right to take a cut on these transactions.

        It is not my cup of tea but it has no impact whatsoever on the real economy. The real damage is done when credit is created for land purchase ie real estate, and the land titles are used as collateral for that credit. This creates a self-feeding land price credit bubble, and that really does affect the physical economy in the most damaging way possible. FTT is a dangerous irrelevancy because it has diverted attention from the really damaging processes that are still going on unchecked, unnoticed and scarcely remarked upon.

  6. ftfsos December 15, 2012 at 2:24 pm #

    It obviously is not a tax on banks as i read of the tax months ago. It is a tax on stocks. Banks have always conducted very little to no stock trading other than some banks acting as market maker. The tax is designed to exempt market makers. Other exemptions include purchases on the primary market, purchases aimed at creating liquidity in the market, intragroup operations, employee share schemes, and most importantly, intraday trading operations are not taxed either, meaning long-term holders are taxed.

    Stocks are for investors. Stock is taxed. So that leaves the investors to be taxed.

    This is what would happen if the exemptions were removed, and yes, the people still pay: Note the proposed Euro tax. Even the EU parliament that designed the tax says it will severely damage the economy and yet they push ahead with it anyway to damage the economy and gain more power: UK Parliament Economic Sub-Committee of the House of Lords, “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax.”

    UK Parliament European Scrutiny Committee citing the EU Commission’s FTT Impact Assessment, before including negative relocation effects, “a 3.43% fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.”

    IMF’s FTT Final Report For The G-20, June 2010, “Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector. Because it is levied on every transaction, the cumulative, ‘cascading’ effects of an FTT—tax being charged on values that reflect the payment of tax at earlier stages—can be significant and non-transparent.”

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