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Taxing Financial Transactions: Still a Bad Idea

Article by Robert E. Litan June 28, 2012 //   3 minute read

With the European economy and the Euro in dire condition, you’d think that E.U. policy makers would have better things to think about than imposing a tax on financial transactions, but you’d be wrong. According to the June 22 edition of the Wall Street Journal, while E.U. finance ministers have dropped the idea for an E.U.-wide financial transactions tax — in large part apparently due to sensible opposition from the U.K., Sweden, and Ireland — the E.U. left open the idea of allowing a smaller group of countries to impose the tax. Indeed, according to the report, Germany and Austria warned that their support of the European Stability Mechanism (the name for the Euro bailout fund), might hinge on a transactions tax being enacted. The Swedes know all about the dangers of such a tax. They tried one in 1984, only to see much of their equities and bond trading move elsewhere in Europe. The British Chancellor the Exchequer, George Osborne, must have had that experience in his mind when saying that he opposed any transactions tax that wasn’t global — an outcome everyone knows is not in the cards. Of course, even if a global tax could somehow magically be agreed upon, it would not deliver the revenues that many finance ministers expect. Any tax, even a small one, would sufficiently gum up financial markets causing major declines in the volumes of transactions taxed. Moreover, with volumes drying up, spreads between what buyers want to pay and what sellers ask for would certainly widen, causing trading costs to rise. And for what? Because governments are angry at financial institutions and want them to pay for the mess to which they have contributed? An understandable reaction, but then so are temper tantrums thrown by kids who can’t get their way. That doesn’t mean we should give into the tantrums, especially when the outcomes have no redeeming value. So if some E.U. countries wants to tax their financial transactions, let them go right ahead. Markets in London, the U.S., and Asia would only benefit as a result. But probably not for long, since the countries imposing the tax would soon wake up to this reality and drop the whole idea. Since that result is inevitable, leaders should drop the idea now.