A financial transaction tax would lead to more regulation and bureaucracy

Last week the European Commission presented its proposal for a financial transaction tax (FTT) for the EU27. The new tax is supposed to be on all kinds of financial transactions in regulated and unregulated markets. I don’t want to re-examine the arguments put forward elsewhere against such a Tobin tax, for instance relocation of business, increased volatility in markets, misleading price signals etc. However, there are several additional reasons to question the practicability and benefit of the FTT.

Firstly, the FTT includes a wide definition of financial institutions - those entities ‘undertaking…carrying out…acquisition of holdings in undertakings.’ How I read this, it could include holding companies, private equity and venture capital, too. If that is the case not only the financial sector will be affected but also the other sectors of the economy. Raising venture capital as well as the takeover of companies (if shares are involved) will be taxed. I am not sure whether this is the intention. To overcome this shortcoming further regulation would be necessary.

Secondly, financial transactions between European citizens and financial institutions outside of Europe will be taxed. As the proposal makes financial institutions liable for the payment of the FTT, the bank outside Europe is obliged to pay the tax. I wonder how this could be administered. The EU suggests that also every party to a transaction should become jointly liable for the FTT. But how does the tax authority know about the transaction? Further intrusive regulation would surely be forthcoming to address this.

Finally, the FTT proposal apparently does not take into account that relocated trading will not be under supervision of European authorities. If banks relocate trading via subsidiaries to countries outside Europe, risk positions could further affect their parent banks. However, the subsidiaries might not be under control of European banking supervision. That would certainly counteract the aim of the FTT to avoid future crises. Thus there will be strong incentives for the EU to press for stricter controls in countries outside the EU.

These are just three points that question the practicability of the proposed FTT besides the well known arguments. The tax would not only result in relocation of business and loss of income but also in more regulation and bureaucracy. A new spiral of costly regulation would ensue. Politicians should therefore think twice before supporting the FTT.

The proposals for a FTT makes me think that quite another game is in play. There are three possibilities (i) the EU Commission are genuinely insane or stupid such that they do not realise that an FTT is a stupid idea - this is improbably, although not impossible (ii) the Commission knows that the FTT will severely damage the EU economy but is willing to accept this as a price for pursuing their perverse agenda (I'd credit the French with this sort of thinking, they enjoy nothing more glorious than a heroic catastrophe) - or they actively wish to damage the UK economy as the UK will bear the brunt (iii) the Commission knows that the FTT proposals are ludicrous and that they will fail but wants to appear to be doing something to bash 'bankers', the popular game of our times. This may, of course, be in part to divert our attention from their own incompetence. Alternatively, it may be to extract concessions elsewhere e.g. to forestall a renegotiation of the EU treaties or the CAP lead by the UK perhaps. Personally I suspect the latter, which is, in the short-run the least appalling outcome. In short, EU politics are far more Byzantine than perhaps they are given credit and like most politics the process is as important as the outcomes (which is why we'd do well to have far less politics!).

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