Financial Transactions Tax

I’m intrigued by this financial transactions tax that French President Sarkozy and German Chancellor Angela Merkel want to levy. Under this plan, stock and bond trades would be taxed at 0.1% whilst derivatives get taxed at 0.01%. It appears this tax is known as a Tobin tax, named after Prof Tobin who proposed a tax on foreign exchange transactions. Not sure getting a tax named after you is the highest honour in tax.

Anyway, over in UK, David Cameron, the British Prime Minister has stated that he would veto such a tax unless it was imposed globally, fearing the repercussions it would have on the City of London. This seems to be a politically popular decision, and certainly pleases the financial institutions. The argument made surely is that such a tax would increase the costs of carrying out financial transactions in London and drive investors into the open arms of other countries, thereby driving job/consumption etc opportunities overseas. Transaction volumes are likely to fall sharply which also means lower profits and thereby lower taxes payable. This is exacerbated by the fact that the market is very liquid, and investors can transfer their funds to buy shares on another stock exchange literally in a matter of seconds. The net effect would be reduced economic growth.

The counter argument is that it will raise a lot of money even though it may reduce the amount of transactions taking place. It’s also a way for Sarkozy and Merkel to show to the electorate that they are willing to stand up to the financial institutions, and fight for the people. Also, it may be said that if taxes are not raised here, it would have to be raised elsewhere and that elsewhere would be in things like income tax or VAT etc, areas which affect the ordinary citizens a lot more.

At the end of the day, where there is some good and some bad no matter which decision you make, it’s all about what the net effect of the tax will be. We also can’t discount the powerful effect of politics in this. However, with so much gloomy news coming out of Europe these days, I just hope that some certainty is achieved and that the decision, whichever is taken, will allow for a net positive effect.