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Why Catholics Should Support a Financial Transaction Tax (FTT) Today
The Moral Imperative and Opportunity
Our Church teaches that the financial industry has moral obligations “to serve the common
good of society through the production of useful goods and services” and to help “bring about
the concrete development of the person and society.”1 Efficient financial mechanisms are
needed to meet these duties. In “Caritas Veritate,” Pope Benedict XIV taught prophetically that
“economic growth has been and continues to be weighed down by malfunctions and dramatic
problems. The technical forces in play…the damaging effects on the real economy of badly
managed and largely speculative financial dealing…leads us today to reflect on the measures
that would be necessary to provide a solution.”2
To the detriment of the common good, the stability of the financial sector is increasingly fragile
with the dominance of computer-based trading of financial instruments at incredible speeds
and in massive volumes. This trading is unrelated to the underlying economic fundamentals,
but is driven rather by short-term factors. In response, the Vatican’s Pontifical Council for
Justice and Peace called on governments “to consider…taxation measures on financial
transactions through fair but modulated rates with charges proportionate to the complexity of
the operations, especially those made on the ‘secondary’ market.”3
What is the FTT?
A financial transaction tax (FTT), would place a very small tax (usually between 0.0001%
and 0.5%) on the overall value of the financial transactions. This tax is more analogous to
a sales tax. Compare this above small percentage to the 4-7% sales tax that most U.S.
residents normally pay on other goods. Since profit margins for the massive high-speed trades
now routinely conducted by financial services firms are very small, even a miniscule tax would
have a measurable impact on firms’ behavior. The tax is placed on buying and selling stocks,
bonds, derivatives, futures, options, and/or currencies.
The tax is so small that the vast majority of investors would feel practically no impact.
Those who would be affected are high frequency traders, often financial institutions
themselves and the closely-related “noise traders,”4 who seek profit by very closely following
short-term market trends. These types of transactions have no social value. They do not invest
in jobs and production in the real economy.
Forms of a FTT already exist in many countries, including the U.S. where a 0.0034% tax on
stock transactions supports the Security Exchange Commission’s budget. Between 1914 and
1966, the U.S. had another FTT. The U.K. has long imposed a 0.5% “stamp duty” on sales of
Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church, Libreria Editrice Vaticana
2004, The Vatican, p. 192.
2 Benedict XVI, Encyclical Letter “Caritas in Veritate,” No.21. June 2009.
3 Pontifical Council for Justice and Peace, “Towards Reforming the International Financial and Monetary Systems in
the Context of Global Public Authority,” October 24, 2011.
4 For a brief explanation of “noise” trading, see: Persaud, Avinash, “The Economic Consequences of the EU Proposal for
a Financial Transaction Tax,” Intelligence Capital, March 2012. In brief, “noise trading” focuses on trends rather than
historic metrics of value, increasing market misalignments.
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shared. India, South Africa, Taiwan, and Switzerland are among the other 30 or so countries
imposing forms of a FTT. Eleven EU finance ministers have moved the EU closer to a FTT.
Why an FTT?
Over the past few decades, the financial sector has grown to dominate the economy. In
2010, the assets of the six largest U.S. banks equaled 62% of U.S. gross domestic product –
up from 18% in 1995. The rise of the financial industry has brought important benefits—notably
increased funds available for productive investment and reduced costs for investors. However,
it has also brought significant problems.
The increasing sophistication and variety of financial instruments has not been matched by an
increase in knowledge about risks. Technological improvements have also enabled the
financial industry to operate at ever-increasing speeds and volumes. Many observers believe
that these have now reached a point at which they have begun to destabilize the system,
especially as they tend to promote so-called “high-frequency” and “noise” trading. The
aggregate trading volume has destabilizing effects and recent incidents of significant market
disruptions because of errors or failures in computer trading systems suggest a major financial
downside. Many point out that these effects played a notable role in the recent recession,
foreclosure crises, unemployment rates, and government bailout money.
A FTT would help enhance the stability of the financial system by curtailing such trading,
creating a long-term economic benefit: stability in financial markets helps protect the common
good.
FTT Revenue
Some opponents argue that a very large share of financial activity would either cease or simply
move to other, untaxed overseas markets, thus generative little revenue. However, proponents
point out that the demand for financial transfers is relatively inelastic and suggest that a FTT
could raise tens or even hundreds of billions of dollars annually. 5 Thus, it offers the potential
to make more revenue than the any of the other major tax proposals—ex. allowing the
Bush era tax cuts for rich to expire and closing loopholes allowing overseas tax havens.
Globally, FTT’s brought in $38 billion in 2011. The EU estimates that a 0.1% FTT on equities
and bonds and a 0.01% FTT on derivatives would raise about 57 billion euros annually.
Conclusion
The argument for a FTT begins with the moral premise that economic life can only serve the
human person if it serves the common good. Public policy needs to regulate economic life to
this end. Some forms of financial activity, notably high-frequency and related noise trading, do
not do this. An appropriately structured FTT could redress the misapplication of economic
resources to non-productive activities which this trading encourages, which is one element
driving increased economic inequality between rich and poor.
Avinash Persuad for Intelligence Capital suggests that a 0.1% FTT would cut demand by 5-15%, still allowing for
significant revenue generation. (March 2012, “The Economic Consequences of the EU Proposal for a Financial
Transaction Tax.”). Dean Baker of the Center for Economic Policy Research has an estimate of $177 billion annually.
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