Tax Policy Center Event Discusses Taxes on the Financial Sector

When discussing new types of revenue or tax structures for the federal government to consider the other month, we touched on financial sector taxes as one of those options. The idea has caught on in Europe, with many countries and the European Commission proposing taxes of these sorts, although UK Prime Minister David Cameron has opposed it over concerns about its effect on growth. In the U.S., a bank tax has been in the President's budget each year since 2009, while financial transactions taxes have been proposed by some members of Congress (see here for example).

These type of taxes are often justified not just for revenue purposes, but also for discouraging speculation and high frequency trading, for making the financial sector repay governments for the financial support they received in the aftermath of the financial crisis, or as a premium for implicit insurance that large financial institutions have if they are perceived as "too big to fail."

Given the attention that financial taxes have been receiving, Tax Policy Center held an event on Friday entitled "Making Wall Street Pay: The Pros and Cons of Financial Taxes." The panelists were generally supportive of some type of financial tax, but they differed about how to do it. Two different regimes were the most widely discussed: a financial transaction tax (FTT), which taxes the value of transactions on the secondary market and is the more commonly proposed type, and a financial activities tax (FAT), which is levied on at least some portion of the wages and profits of financial institutions--essentially a valued-added tax (VAT) for finance.

One of the speakers, Michael Keen of the IMF, placed more emphasis on the FAT, having co-written a report favoring the FAT over the FTT (although the report did not necessarily endorse adopting a financial sector tax). Keen argued that the FAT would be a more targeted way to address the concerns that financial taxes typically look to fix and that the burden of the tax would be less likely to be passed on to investors. He also argued that a FAT would lessen distortions in countries that have VATs since they usually exempt financial services from tax. Daniel Shaviro of New York University, in both the event and background materials, agreed that a FAT would be superior and did support imposing one. He said that an FTT would be more economically inefficient, discourage economic activity in ways unrelated to the goals of the tax, and perhaps be easy to avoid.

Lee Sheppard of Tax Notes and Damon Silvers of the AFL-CIO, however, sided with the FTT. They both argued that the FTT would be easier to administrate, with Silvers arguing that the tax left less room for "manipulation" than a FAT. Sheppard also felt that the FTT would do a better job of essentially "cleaning up" the financial sector, in addition to being easier to collect. Silvers also argued that raising revenue should be the number one priority of a financial sector tax, and that an FTT could raise a large amount of revenue at a low rate compared to other financial taxes due to its huge tax base.

Whether it's a FAT, an FTT, or a bank tax, financial sector taxes remain in the discourse in the U.S. and especially in Europe. Whether it takes hold as a revenue-raiser remains to be seen.