Europe's Crazy Finance Tax

Revenge masquerading as policy.

Wrangling among the 11 euro-region nations planning to tax financial transactions is further evidence, if any were needed, that the levy is a bad idea that should be abandoned.

The European Commission acknowledges that the latest version of its planned financial transactions tax (or Tobin tax, or Robin Hood tax, if you prefer) isn't the best option. That, it says, would be a globally coordinated toll on trading -- which is laughably unlikely. The narrower the tax's coverage, the less sense it makes. That's why Europe's proposed transactions tax isn't even second-best: An earlier effort to apply it across all 27 European Union members failed.

In its current diluted form, the tax would charge 0.1 percent for nonderivative securities such as government bonds or company shares, and 0.01 percent on the notional value of derivatives trades. Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, Spain are the willing 11 countries; but they can't agree on how to divvy up the proceeds. They're struggling to meet a self-imposed deadline for an agreement by the end of the year, with the duty scheduled to be imposed by the end of 2015.

The most fundamental question about the tax still hasn't been answered -- what's it for? If the aim is to reduce volatility and speculation in the securities markets, it's far from clear that the tax would work, according to a study by the consulting firm PricewaterhouseCoopers.

If the idea is to strengthen the economy, the tax is a failure at the planning stage. Depending on how the proceeds were spent, the commission itself estimates the transactions tax would raise the cost of capital and could cut as much as 0.28 percent from gross domestic product -- a little more than it would raise in extra revenue. With the bloc threatening to slide back into recession, you'd think any policy that risked hurting growth would be rejected out of hand.

The chief motivation for the tax is populist politics: It's mostly about vengeance for the financial crisis. Bashing bankers, regardless of the collateral damage, remains popular with European politicians. The commission's justifications for the tax are based more on the desire to punish, and on resentment over bankers' pay, than on reducing risk. "The tax revenues collected should constitute a fair and substantial contribution from the financial sector for covering the cost of the financial crisis," it says. And it sees the tax as an apt response to the "significant earnings premium in the financial sector."

Finance needs to be effectively regulated, with systemic safety to the fore. Revenge is not the point -- least of all if it harms the economy into the bargain. Wim Mijs, the chief executive of the European Banking Federation, said last week that the tax is "about the worst idea of the last three centuries." That might be putting it a little high, but he's right that the sooner Europe abandons this notion, the better.

--Editors: Mark Gilbert, Clive Crook

To contact the editor on this story:
David Shipley at