In my column on Friday, I looked at the proposed European transaction tax from a stock market perspective, and found it to be reasonable.
A friend who is a tax lawyer says — rightly — that I should have considered bonds, particularly short-term Treasury securities. He has a point.
The proposed tax would be applied to all trades in stocks, bonds and derivatives that were engaged in by European financial institutions, or in European markets. That encompasses about everything. For stocks and bonds that tax would be one-tenth of 1 percent of the value of the bond. There would be no tax when the bond is sold at issuance, but there would be a tax whenever it changes hands after that.
The trouble is that Treasury bills these days yield almost nothing. The current rate on one-month bills is a little under 0.1 percent. A tax of 0.1 percent would wipe out the yield entirely.
Treasury bills are prized for their liquidity, meaning that if you need cash you can sell one at any moment. Who would buy it in the secondary market with this tax? When I asked one European official about that, he pointed out that there would be no tax on borrowings, so you could repo the T-bill without paying the tax.
The tax would not apply if American institutions traded the bills, but would if banks from the European countries planning to levy the tax chose to do so. That list includes France, Germany, Italy and Spain.
The tax would apply to any bank anywhere trading German government securities. Their yields are — believe it or not — a tad bit lower than American yields.
It seems to me that there will need to be some exceptions made.