By Mark S. Nelson, J.D.
The financial transaction tax (FTT) will make an appearance in the 117th Congress now that Rep. Peter DeFazio (D-Ore) has announced his intention to reintroduce a bill that would amend the Internal Revenue Code (IRC) to impose the tax. Even with Democrats soon to hold majorities in both the House and Senate, it would likely be a big lift for Democrats to enact the FTT, especially with a narrow Senate majority. On a separate note, Rep. Carolyn Maloney (D-NY) has introduced legislation that seeks to give law enforcement a new tool for identifying the corporate entities that may have funded groups whose members participated in the January 6, 2021 U.S. Capitol insurrection.
Financial transactions tax. Although the text of the latest iteration of the FTT bill was unavailable at the time of publication, a few likely conclusions can be drawn about it contents from the version of the FTT introduced in the last Congress by Rep. DeFazio and Sen. Brian Schatz (D-Hawaii). Under the prior bill, a new IRC subsection would impose a 0.1 percent tax on a specified base amount of a covered transaction in any security.
That would mean that a stock trade, for example, would be taxed based on the fair market value of the security at the time of the transactions or, for a derivative, the amount of any payments (i.e., the "specified base amount"). "Covered transaction" would mean similar, but slightly different things, depending on whether the transaction includes a derivative. Many stock transactions would be covered transactions and, thus, subject to the FTT if they involve an exchange located in the U.S. or the buyer/seller is a U.S. person. Derivatives transactions would fall within the ambit of the FTT if the derivative is traded on a U.S. exchange or if any party with rights under the derivative is a U.S. person.
The bill would carve out an exception from the FTT for initial issuances of: (1) corporate stock buybacks; (2) partnership and beneficial interests in partnerships or trusts; and (3) notes, bonds, debentures, and other types of debt instruments. However, certain short-term debts instruments would still be subject to the FTT (e.g., debt traded on a U.S. exchange with a fixed maturity less than 100 days).
With respect to who pays the FTT, the bill states that, in the case of a U.S. exchange, the exchange pays; in the case of a transaction that uses a U.S. person as the broker, the broker pays.
Representative DeFazio said in a press release that the FTT would limit high frequency trading and could, over a ten-year period, generate $777 billion in new revenue. Said Rep. DeFazio: "Some days high-frequency traders trade billions of shares that they sometimes hold for only seconds or less. They reap enormous financial benefits for themselves and their privileged elite investors but add no value to our economy. Congress needs to rein in excessive speculative activity and protect working families from these dangerous practices while maintaining appropriate market liquidity."
The proposed FTT has come under scrutiny by industry groups before, such as from the Investment Company Institute in April 2019. The ICI said an FTT would punish both Main Street and Wall Street and that the effect of a 10 basis point FTT could be equivalent to a 31 percent increase in the average expense ratio of many equity funds held in 401(k) plans. Industry groups also have opposed the FTT at the state level in New Jersey and New York. Consumer groups, such as Americans for Financial Reform, have repeatedly called for enactment of the FTT as a means of raising revenue for what AFR has previously called a Main Street "restoration." Several groups, including AFR, have expressed support for the latest version of the FTT introduced by Rep. DeFazio.
AML and the insurrection. According to Rep. Maloney, law enforcement investigators cannot wait several years while federal regulators create a database mandated by the recently enacted anti-money laundering bill known as the Corporate Transparency Act, which Rep. Maloney had sponsored. The Corporate Transparency Act was enacted to overcome the difficulties in tracking down beneficial owners of shell companies. As a result, companies now must disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) upon formation.
Rep. Maloney, however, said the Insurrection Financing Transparency Act would allow law enforcement to go directly to a company and seek the identity of that company’s beneficial owners if law enforcement agents certify that the company is the subject of an investigation into the events at the U.S. Capitol on January 6, 2021. Civil and criminal penalties would be possible if a company fails to comply with a request from law enforcement agents.
"Our nation is still reeling from the horrific attacks on democracy and the Capitol Building on January 6, 2021, and I am determined to investigate this assault and ensure similar events never happen again," said Rep. Maloney. "Just as important as it is to prosecute the rioters, it is equally important to investigate the financing behind this mob attack. If we are to fully understand how these riots occurred, we must follow the money."