France's Transaction Tax Punishing Small Investors
Traders Magazine Online News, November 15, 2012
As France begins collecting its financial-transactions tax this month, it is becoming evident that President Francois Hollande’s levy is hitting all but the people it was aimed at: speculators.
Hollande, who called finance his “main adversary” during his election campaign, pushed through in August a 0.2 percent transaction tax on share purchases, making France the first and only country so far in Europe to have such a levy. Many investors have been escaping the tax using so-called contracts for difference, or CFDs, offered by prime brokers that let them bet on a stock’s gain or loss without owning the shares.
“The target was supposed to be finance with a capital F, which is sort of a black box,” said Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris. “Instead, we are punishing small investors who aren’t to blame and already are frightened off by losses in the market.”
On Nov. 1, the state started collecting the levy on the purchase of 109 French stocks with market values of more than 1 billion euros ($1.2 billion), including Sanofi SA and Vivendi SA. While the government expects the tax to add 530 million euros to its budget in 2012 and 1.6 billion euros next year, the finance ministry says it’s too early to say if these estimates are realistic.
The ministry concurred with traders’ and analysts’ assessment that market players will use a range of derivatives to skirt the tax, leaving small investors bearing the burden.
‘Modest’ Blow
Hollande himself this week conceded that the tax was only a “modest” blow to the finance sector.
His other plan to fight “speculators” includes splitting French banks’ retail and investment activities and increasing taxes on lenders’ salaries and speculative operations. A bank bill will be unveiled on Dec. 19, Hollande said last week.
The French finance ministry official charged with crafting the transaction-tax bill said it was impossible to impose a levy on CFDs, or on any derivative not related to a territory. He cannot be named according to government ground rules.
While the tax’s impact on curbing speculation is limited, it has helped Hollande gain political capital with his base and burnished his Socialist credentials.
“This tax sends a strong political message, even if it’s too early to evaluate its impact on markets,” Gerard Rameix, the head of France’s independent Market Authority Regulator, said in an interview.
Rameix says the tax’s efficiency will improve if its basis is “broadened technically and geographically,” with more than one country imposing it and more products covered.
Counterproductive Tax
The tax needs to be accepted internationally for it to be effective and carry a bite, said Matthieu Giuliani, a fund manager at Banque Palatine SA in Paris, which oversees $5.1 billion.
“The idea isn’t bad,” he said. “Governments have been raising taxes in general so why should the financial community be sheltered? But it must be done on an international level. If just a few countries do it, volumes there will decline more than the tax itself, making the tax counterproductive.”
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