Time to Kill Another European Transactions Tax Proposal: View
Some bad ideas won’t die. The European Union proposed yesterday raising about 57 billion euros ($78 billion) a year by taxing trades of stocks, bonds and derivatives by financial institutions.
In addition to being politically unfeasible and poorly designed, the tax would undermine the one thing Europe needs most to counter rising debt burdens: economic growth.
A transactions tax was first championed by John Maynard Keynes during the Great Depression. Another prominent economist, James Tobin, resurrected the idea in the 1970s -- the levy is often called a “Tobin tax” -- as a way to dampen currency speculation. In 2009, the tax idea rose again, this time as a Robin Hood effort to reclaim money from the bailed-out financial sector to make U.S. and European taxpayers whole. Bill Gates, the Microsoft founder, is said to be considering recommending a transactions tax as a means for the Group of 20 bloc to replenish development financing for poor nations.
The tax is doomed -- and for good reasons. Politically, it’s a nonstarter because EU treaty rules require region-wide tax proposals to be adopted unanimously by the 27 member nations. With many British jobs dependent on the vibrancy of the City of London, Europe’s busiest financial district, Britain won’t back it.
The British are being slyly hypocritical here. They already impose a small duty -- a “stamp tax” dating from the 17th century -- on stock trades. The new proposal would raise that tax and divert the extra amount to Brussels. Seeking to soften British opposition, the EU has proposed exempting foreign exchange trades, which the City dominates. U.K. officials still fear the tax would drive financial jobs offshore and so insist they will only support it if it’s adopted globally.
That’s highly unlikely even without the opposition of U.S. Treasury Secretary Tim Geithner, who appears dead-set against a transactions tax.
The case against the tax includes more than political and practical arguments. The U.K.-based Institute of Development Studies has concluded that the tax, which the group supports, wouldn’t increase market distortions but probably wouldn’t stabilize volatile financial markets, either. At the same time, the IDS study agreed with Geithner and others that the tax would ultimately miss its intended targets.
Financial institutions would bear the initial cost, the study said, but in the long run a significant proportion could be passed to retail investors and consumers. Although the EU would try to insulate households and small businesses from the levy -- a 10-euro fee on a 10,000-euro stock purchase would be “not excessive” it said -- banks could bypass fee caps by embedding additional costs in commissions, markups or other tricks.
Among the many reasons to oppose the tax, however, one reigns supreme. The EU says the tax would slow economic growth by 0.5 percent of gross domestic product. At a time when Europe would swoon over a growth rate of 1 percent or more, a proposal that entails a half-point decline in GDP represents bad policy, badly timed.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.