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Taxing Financial Transactions: Still a Bad Idea

June 28, 2012 3 minute Read by Robert E. Litan

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.


Author

Robert E. Litan

2012 Economic Growth Fellow

Robert E. Litan is Director of Research of B-Gov, a subsidiary of Bloomberg LLP. Previously Litan was Vice President for Research and Policy at the Kauffman Foundation and a Senior Fellow in Economic Studies at the Brookings Institution. He has authored or co-authored more than 20 books, edited another 14, and authored or co-authored more than 200 articles in journals, magazines, and newspapers. He has served in several capacities in the federal government. From 1995 to 1996, he was associate director of the Office of Management and Budget, and from 1993 to 1995 he was Deputy Assistant Attorney General. He received his B.S. in economics (summa cum laude) from the Wharton School of Finance at the University of Pennsylvania; his J.D. from Yale Law School; and both his M. Phil. and Ph.D. in economics from Yale University.

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