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Although congressional calls to enact a financial transactions tax seem to have waned in recent months, academics and practitioners are still struggling with what role tax will play in proposals to reform financial markets.
At a recent conference on financial sector tax issues in a postcrisis world, Thornton Matheson, an economist with the IMF and formerly with Treasury's Office of Tax Analysis, warned that while a tax on the issuance or trading of financial securities could reduce speculation, it would also impair market function.
Matheson said that securities transactions taxes (STTs) reduce asset values and raise the cost of capital.
Peter C. Canellos, head of the tax department at Wachtell, Lipton, Rosen & Katz, said one cause of the financial crisis was the tax bias in favor of debt and the various incentives that have arisen around that bias.
Canellos proposed a solution in which financial institutions shouldn't be allowed interest deductions for any part or even all of an instrument that is given equity credit for financial statement purposes. He also suggested getting rid of what he characterized as "the perfect tax shelter" -- the mortgage interest deduction combined with an exclusion for home-sale gains that have not been rolled over into another home purchase.
View TaxAnalysts' Amy Elliott's article in its entirety on TAX.com.