business current affairs economics

France’s new financial transaction tax

Today sees the introduction of France’s new financial transactions tax. Nicolas Sarkozy laid the groundwork for it and has been a champion of the idea, and new president Francois Hollande has accelerated the proposals through. There have been lots of talks about a Europe-wide FTT. Those talks have failed, usually with Britain putting its foot down. France has now decided to press ahead unilaterally, and it may not be the last Eurozone country to do so.

There are actually three new taxes coming in, all aimed at various aspects of the financial industry.

  • The first is the FTT proper, which will apply a 0.2% tax on trading in listed companies valued over a billion euros – just over 100 companies at the moment.
  • The second is a tax on high frequency trading. The tax here is rather technical, but so is the trade itself. In a nutshell, high frequency trading relies on super-fast computers that can read patterns in market activity and execute orders in fractions of a second. In theory, it adds liquidity and may make markets more stable. The downside is that only the biggest players can do it and they ride on the trading activity of others, making it inherently unfair. In some markets, there is now more high-frequency trading than conventional trading, and the French will be making a bold move in cutting the practice down to size.
  • The third is a 0.01% tax on credit default swaps on sovereign debt. These are the derivatives that allow traders to make quick profits out of a country’s economic collapse. Investors buying sovereign debt to hold long term or for hedging purposes won’t pay the tax – it will only apply to those jumping in when a country is in trouble.

Taken together, these three taxes will form a moral backbone for the French financial industry. It won’t come for free – this will cost French banks and hedge funds money, but it will slow or prevent more predatory aspects of trading. An old fashioned view it may be, but there is such a thing as right and wrong, and the French government has had the nerve to call time on some things that are profitable, but wrong. That’s not something our government has the balls to do here in Britain, where all things bow to the City.

Having said that, we will have to wait and see whether it works or not. I agree with the principles of the Financial Transaction Tax, but it’s easier to create a bad one than a good one. It’s complicated, and if you get it wrong you can wreck your financial sector. That’s not a reason not to do it – but you do have to design it meticulously. I’m not a tax lawyer and could not possibly say whether France’s taxes are written well.

If they are, then this could be a moment of real leadership on standing up to the financial sector and legislating for a more moral capitalism. It would scupper the scare-mongering antics of those out to protect the status quo, and open the door for a Europe-wide FTT. If it turns out to be full of loopholes or the percentages are set so high as to genuinely endanger French banks, then it will play straight into the hands of opponents of reform.

For campaigners and advocates of the FTT, such as myself, today is a good day. But we will have pray the French have designed it well, and watch this space.


  1. Interesting but what is the underlying principle here? Taxation is part of the pattern of reciprocal obligations and duties between the state and the individual. How does these taxes fit in to this pattern?

    1. It’s partly a Pigovian tax – taxing something that is bad for society so that you dis-incentivise it. It’s also a way of balancing activity in the financial sector between investment and speculation. And it raises money at a time of recession, generating revenue from something that doesn’t otherwise contribute to public funds.

      1. It seems to me that politicians love to deflect attention away from their own shortcomings and incompetence. “The speculators” are a good target. You do not hear of speculation against the Scandinavian currencies, because these countries are (relatively) fiscally prudent and the people pay their taxes fairly willingly because on the whole they can be seen to be good value for money.

        It seems to be attacking the wrong target. Speculation in currency is essentially a zero-sum game anyway so what harm does it do. I agree that wild exchange rate fluctuations are a nuisance but if governments have flakey tax systems and mismanage the government they have nobody to blame but themselves.

        1. Iceland, Ireland, Greece and Spain would all disagree with you there. What happens is a country hits a rocky patch, and speculators pile in with bets that the country’s currency or bonds are going to collapse. This becomes a self-fulfilling prophecy, and the traders make a fortune at the expense of the taxpayers in that country.

          Countless billions of bailout money has vanished in this way, and it’s a predatory and completely unproductive way of making money. It transfers massive quantities of public money into private hands. It also means that countries can’t turn a corner. Once you hit the slope, the speculators have more interest in prolonging the uncertainty than seeing a resolution.

          That’s the kind of behaviour taxes like these are designed to curb, and they’re very necessary.

          1. “Iceland, Ireland, Greece and Spain would all disagree with you there. What happens is a country hits a rocky patch, and speculators pile in with bets that the country’s currency or bonds are going to collapse. This becomes a self-fulfilling prophecy, and the traders make a fortune at the expense of the taxpayers in that country.”

            I am not quite sure who in those four countries would disagree with me, but none of them “hit a rocky patch”. Their politicians steered the economies of those countries directly at the rocks. Of course it suits them to try and put the blame elsewhere, and what better choice than “speculators”. The truth is that they were fiscally imprudent and ran tax policies that inevitably put them on course to the rocks. It may be that their electorates were happy for them to do that and would have complained if the politicians had done what was needed, but in that case they are all in it together. The trouble with putting the blame where it does not belong means that the necessary lesson is not learned.

  2. Another great post and thanks fo the update. Just a quick Q – Have they labelled the tax with a snappy name or ideology? Ie Tobin tax, Robin Hood Tax… or something similar. Also have they released the tax with suitable information to win hearts and minds so the French can be proud of this effort or are they testing the waters and only very observant people watching the corners of the internet know about it (you!)? Cheers.

    1. I’m not aware of a snappy title, but it has broad support. It was first proposed under the last government, so it’s been voted for by both left and right. Not sure what the public opinion is about it, but I know it’s much less controversial across the whole of Europe. Sweden is against it because they put one in a few years ago and I went badly. Otherwise Britain is by far the most vocal in its opposition to these things.

      1. The Swedish experience was that it worked so well that it put a stop to the activity to the point that next to nothing was raised. Which in turn caused further problems as currency trading is essential for international business. But since the present financial crisis was caused by the bursting of a credit-fuelled land price bubble, it is completely irrelevant anyway, which is presumably the British position – not that the Brits have the gumption to do what is needed.

  3. I’m not suggesting mistakes weren’t made by politicians, I’m just saying that speculators compound those errors and prevent those mistakes from being fixed. Huge fortunes are made as countries collapse, and taxpayers foot the bill. Of course you learn the lessons – that’s exactly what France is doing here. To let economic mismanagement escalate into a full blown crisis for the sake of private profit is, to me at least, morally reprehensible. Perhaps not to you.

    1. Economic mismanagement is morally reprehensible. And morality is not divisible. One morally reprehensible act leads to corruption all round. Politicians have to take the responsibility of leadership. And a financial transactions tax is just another delaying tactic. It will probably have unintended consequences too.

  4. Don’t you see that a financial transaction tax is taking responsibility? It’s about regulating the financial sector – exactly the thing they failed to do before.

    1. The financial sector does not need regulating, it needs its food supply to be taken away in the first place. Same as rats. You don’t get rid of rats by putting down poison, you have to make sure there is nothing for them to eat. You may have to put down poison but the rats will come back if that is all you do. It is irresponsible to rely on the warfarin, and incidentally the analogy goes further in that the rats find a way of dealing with the poison so that they are not affected by it.

      If you track the thing back far enough you will find that the financial services sector has found a way of capturing the rental value of land, though I agree this is not immediately obvious. The only way to deal with it is to tax land on an annual basis in proportion to its current rental value. Which would raise so much revenue that it would be possible to cut other taxes drastically.

      Are you not aware of it? The French authorities have no excuse not to be.

    1. I think you will find that land is pretty much the beginning and end of the banks’ revenue stream. What else could be the source of this kind of wealth stream? Foreign exchange dealing is a zero sum game.

        1. That foreign exchange dealing is a zero-sum game is surely self-evident. Same as gambling on horses. In fact it is very similar. Probably the main effect is to stabilise exchange rates – by that I mean smooth the fluctuations, which is surely a good thing. Actually it is worse than that because there are transaction costs.

          Banks create credit out of nothing at virtually no cost. A positive balance is matched by a negative one. The proper purpose of credit is to facilitate production – it pays for the construction of, say, a ship, and the credit is extinguished when the ship has made a few profitable voyages. Each advance of credit results in further wealth being created as the ship progresses towards completion. The partly built ship itself is the security for the credit in this instance.

          There is in principle no necessity to charge interest. The bank can charge directly for its services and insure any risk.

          But much credit is not of this kind. Interest is invariably charged. Much of it is for land purchase and secured on the price of the land title itself. And other credit is generally secured on a land title. Thus the banks become, for the duration of the loan, part owners of the land. What is referred to as “interest” is mostly rent of the land for which the credit has been given. Land purchase is an improper use of credit because it results no production, since the land was there from the outset and needed only to be released from the control of a previous occupier who was using it less than optimally. It is payment of a ransom fee. But the important point is that behind this loan is a land title.

          Land titles are also bundled up inside equities and other securities. Much of the value of Tesco and M&S for example, is the value of its property portfolio. If the property is worth more than the shares, the company will quickly be taken over and “asset-stripped”. This is not a bad thing because it means that the company was using land less efficiently than another potential user and thus locking people out of economic opportunities.

          A problem arises when the land sits on a company’s books and is not used except that the title is used as security to raise money on.

  5. That’s a great explanation of the role land plays in banking – an easily overlooked facet of the industry. What I don’t agree with is that this is the beginning and the end of the bank’s revenue streams. It’s certainly the beginning, but one of the main causes of the financial crisis is that those original assets (the houses and land held in mortgages) were extrapolated too far.
    When derivatives are created off the back of those assets through securitization, the actual connection with the land is lost. We know the connection was meaningless, because when those derivatives failed, the losses were far bigger than the worth of the assets and that’s why the banks collapsed so quickly.
    If land was the end of the revenue stream, the financial crisis wouldn’t have played out in the same way. Its the way the banks have managed to transcend the underlying assets and make money out of money that has fuelled the boom in financial services. It’s not just land either, the same processes are at work in commodities and shares.

    1. The “extrapolation too far” is speculation. The underlying value of land is its rental stream. The capitalisation of this is around twenty times. Anything more than that is speculative. Sooner or later the prices will drop down to what appears to be a base level. They used to say that a field is worth the price of twenty years’ harvests. So all those derivatives are an inverted pyramid resting on the capitalisation of the rental income stream. It’s crackers.

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