The financial meltdown in 2008 was supposed to change how banks and Wall Street were regulated and taxed. The idea that trading was too volatile and that banks were engaged in numerous risky transactions caught hold. There was a growing belief that financial institutions and investment firms should help fund the cost of future bailouts. However, five years later little has changed. The United States got the Dodd-Frank Act, a heavily watered-down regulation package, and some of the European Union pushed ahead with a financial transaction tax. But Treasury and the SEC are struggling to implement the former, and the latter has run afoul of the complicated European legal framework.
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The United States’ efforts to re-regulate the financial sector have been largely nonexistent. President Obama’s attempt to tax excess risk (incorrectly referred to as a bank tax in most press coverage) never went anywhere. The Dodd-Frank Act was largely drafted by two lawmakers with strong ties to investment firms, banks, and Wall Street, and thus isn’t exactly a return of Glass-Steagall. A financial transaction or financial activities tax has never made much headway in Congress despite being proposed (the latest effort by Sen. Tom Harkin and Rep. Peter DeFazio hasn’t even been considered in a committee). In short, the United States has declined to take the lead in reacting to the 2008 crisis, either through new regulation or new taxes.
A financial transaction tax at first seemed to be faring much better in Europe. France, Germany, and nine other EU member states agreed to impose a levy on share, bond, and derivatives transactions after discussions about a tax on all of Europe broke down. The tax would amount to 0.1 percent of share and bond trades and 0.01 percent of derivative transactions. The United Kingdom and 16 other EU states objected to it because it would harm European competitiveness if similar levies weren’t in place globally. But many commentators believe that if the 11 EU states successfully implement the tax, it will provide a model for other nations, including the United States, to follow.
But despite the agreement, the tax’s future is in doubt. Earlier this summer, it was announced that the financial transaction tax would be delayed. Member states were having second thoughts about how to collect it and how to distribute the revenue. The delay was expected to push the tax’s effective date into the middle of 2014.
A much more serious setback occurred September 11 when the European Council Legal Service issued an opinion stating that the tax’s extraterritorial reach would infringe on the tax rights of nonparticipating member states. The EU tax commissioner has rejected the opinion, while opponents of the tax, particularly the United Kingdom, have used it as an excuse to once again call for scrapping the plan altogether. As of today, the tax’s future is in serious doubt. The legal opinion has only reinforced the doubts that were already starting to take hold in nations that formerly supported discouraging excessive trading and raising revenue from financial institutions.
The United States now seems vindicated in its decision not to seriously consider a financial transaction tax. If the EU effort fails, it is unlikely that Harkin’s bill or other Democratic proposals to tax the financial sector will ever see the light of day. And that’s unfortunate. Whether a tax on transactions is better than a tax on activities or a direct levy on banks isn’t really important. What is important is that the financial sector, which bears a disproportionate share of the blame for the deep recession that is still affecting employment and growth, share in the costs of insuring against future bailouts and be forced to restructure itself to better insulate the rest of the economy from excessive risk. If the European Union, or even part of it, were successful in implementing a financial transaction tax, the idea wouldn’t have seemed so far-fetched to U.S. lawmakers or anyone looking for financial reform or revenue for deficit reduction.
