* Wall Street's competitiveness argument hurt-analysts
* EU member-state approvals still a high hurdle for tax
By Patrick Temple-West
WASHINGTON, Oct 3 (Reuters) - The European Union's proposal for a tax on financial transactions could give a boost to imposing a similar levy in the United States, with Wall Street arguments about U.S. competitiveness potentially weakened.
While Europe is closer to embracing a transaction tax, it has long been rejected by both Democrats and Republicans in the United States. One of the main reasons?
Financiers have consistently warned it would hurt the economy by driving transaction volumes away from Wall Street and toward offshore money centers without the tax.
Now, with the EU moving toward adopting the tax, a main avenue of escape for U.S. traders -- to London or Frankfurt, for instance -- could be cut off, leaving them with a shorter list of places they could credibly threaten to flee to.
"Europe would be off the table" for U.S. traders looking to dodge a U.S. transaction tax if the EU ultimately adopts the proposed levy, said Brian Gardner, policy analyst with investment firm Keefe Bruyette & Woods in Washington.
That is still a big "if," of course, he said.
The European Commission, the executive of the 27-nation EU bloc, last week proposed to tax most financial transactions -- ranging from equities to bonds to over-the-counter derivatives -- bought and sold by at least one party based in the EU.
Some other global trading hubs already have a transaction tax. Both Hong Kong and Singapore, for instance, tax equity trades, according to the International Monetary Fund.
The EU tax, which would become effective in 2014, could generate 57 billion euros annually, the EU estimated.
The tax faces stiff opposition from EU member countries, significantly the UK, with its vital London markets.
Gardner emphasized that approval of the transaction tax by all 27 EU member-states is a "pretty darn high hurdle."
He added that discussion of the tax raises headline risk in the United States that "will stick around for a while."
DEFAZIO BILL STALLED
Legislation calling for a U.S. transaction tax went nowhere after it was introduced in 2009. Democratic Representative Peter DeFazio proposed taxing stock trades at 0.25 percent, with exemptions for trades made in investment savings accounts. Certain derivatives would have been taxed at 0.02 percent.
French and German finance ministers earlier this month called on the EU to lead a "global mobilization on this issue," adding the tax "does not affect European competitiveness."
Proponents of the tax received support from a recent Gates Foundation report that pitched a stock and bond transaction tax to raise $48 billion from members of the Group of 20, a coalition of the world's richest industrial economies. The report called for tax proceeds to aid developing countries.
Without approval from all EU members, a subset of countries may proceed with the tax plan. This "enhanced cooperation" approach requires consent from at least nine members.
Hoping to thwart the EU tax, seven financial and manufacturing trade groups last month wrote to U.S. Treasury Secretary Timothy Geithner, calling on him to dissuade his European counterparts from implementing the tax.
EU MAY SHRUG OFF GEITHNER
When meeting with European finance ministers in Poland last month, Geithner ruled out the idea of a transaction tax. But his clout with EU officials may be limited due to his role in the U.S. financial crisis.
"I don't think the secretary has much leverage at all" in Europe, said Terry Haines, a financial services analyst with the Potomac Research Group, a consultancy.
EU consideration of the tax shows member nations are "grasping at every straw" to ward off the continent's debt crisis, Haines said.
In a contrary view, Haines said the EU transaction tax debate could stiffen opposition among U.S. lawmakers.
"Our policy-makers are likely to reach a very different conclusion on this," he said.
Under the EU plan, the cost of the tax to retail investors would be small. For example, a stock trader purchasing 10,000 euros of shares would pay 10 euros on the transaction.
By limiting the cost to retail investors, the EU proposal could set up a "Main Street vs. Wall Street" divide.
"That will be one of the arguments made" by the tax's supporters, Gardner said. A tax that "just doesn't seem to be felt" by the average taxpayer could be appealing, he said. (Reporting by Patrick Temple-West, Editing by Kevin Drawbaugh and Sofina Mirza-Reid) (email@example.com)