It is difficult to think of a more ill-thought-out policy than the proposed EU-wide transactions tax. A theoretical case can be made for a global Tobin tax, albeit not a strong one. But this particular proposal shows the EU at its worst—essentially fiddling in Brussels while the Treaty of Rome burns. This is an anti-free-trade measure and an anti-commerce measure, pure and simple.
Over the last few weeks, economists have been trying to work out how to deal with the debt crisis in the euro zone. Should insolvent member states be bailed out by the European Financial Stability Facility? Should the EFSF be bailed out, in turn, by the ECB? More crucially, if member states default, should their banks be recapitalized with taxpayers' money?
In my view, the answer to all these questions is "no." EU officials believe that the answer is "yes." Yet they still think that it is a good idea that a banking sector that could be destroyed by sovereign default should have a £50 billion-a-year tax imposed upon it.
Though the details are unclear, the tax would apparently be used for general EU spending and not for national government spending. The ostensible reasoning behind it is that the financial sector pays insufficient tax and that much of the financial activity that would be taxed is "socially useless," to borrow the phrase of Adair Turner, the chairman of the Financial Services Authority. But how can a government distinguish between socially useful and socially useless investment transactions? Purchasing equities to put in a pension fund will be taxed at 0.1%, but derivatives at 0.01%. Is the former transaction more useless than the latter?
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