On the subject of the ill-fated EU transaction tax, it is of little comfort that, seven minutes ago, the FT reported a study commissioned by the City of London Corporation which came — according to the FT article at least — to the same conclusions we have come to here in February.
This study says the cost of funding for businesses and governments in Europe will go up, because investors will want compensation for the higher cost of trading and the lower liquidity. It estimates that the cost of funding for the UK government alone would rise by more than 10% of what the entire tax construct is expected to bring in Europe-wide.
European governments in the EU-11 who have signed up to this tax will be affected much more, and businesses in aggregate even more still. Now that we have these calculations, and the current experiences of the early starters Hungary, Italy, and France, we can say with some confidence what this is:
- A tax that costs governments alone more than it is projected to raise in revenue, and
- Which has reduced liquidity, or has driven trading off-shore (it really did, where it has been introduced, by almost one half)
- Which therefore raises less than half the projected amounts where it has been introduced so far. In fact, in Sweden, where the experiment ran for a lot longer in the 80’s, the eventual revenue was less than 1/10th of what had been expected, plus it reduced revenues from capital gains tax to such a degree as to more than nullify the Tobin tax revenue altogether, even before increases in government borrowing rates are factored in (the paper by Marion Wrobel is almost 20 years old, but still an excellent and exhaustive study of international examples).
- Which will hurt real business (and not necessarily financial ones) in the same way as it hurts governments
- Which raises heckles globally (you probably know about the US, Asia, but read also what the House of Lords had to say about it today) because of the unreasonable expectation that entities wholly unaffiliated with the EU may have to pay it and overseas governments will spend money enforcing a tax they don’t benefit from.
- which, even in the EU’s own calculations, will lower pension incomes by 8% (page 10 of this link), and thereby open a much wider hole than one could ever dream to fix.
The absurdity of this should by now be beyond reasonable doubt.
One may, for argument’s sake, even perfectly agree with the purported objectives of this tax, like reducing high-frequency-trading or increasing tax revenues from the risk-taking part of the financial sector. But it is clear that this tax achieves neither objective, that it costs real businesses real money, and does not even raise net tax revenues because of the impact on the cost of government debt. Besides, in its full generality, it is simply unenforceable.
A self-serving populist campaign that achieves none of its purported higher purposes and makes money for no-one should be buried and forgotten.