Listen Here

I posted on the financial transaction tax (FTT) being a stupid idea last year, after reading this article in the Economist, which laid out what FTT was about but didn’t offer the opinion that it was stupid. In the comments to that post on this little blog:

We should all be clear that this particular tax will raise revenue for governments, while discourage certain types of transactions and it won’t discourage reckless behaviour of my brethren. If everyone understands that, that’s great. This post isn’t meant to be supporting or not supporting the actual levying of the tax itself.

As it turns out, those responsible for proposing this asinine tax weren’t reading this blog.

***

Fast forward to today where the Economist is now opining for it to be consigned to the dustbins of history (rightly) and goes into further detail on how badly the Europeans are at in the implementation (beyond even my wildest dreams). To wit:

 The European Commission’s proposals for a financial-transactions tax (FTT), published on February 14th, are a masterpiece of bad design…

A group of 11 European Union member states, among them France, Germany and Italy, wants to impose a 0.1% tax on equity and debt transactions, and a 0.01% charge on derivatives transactions…

James Tobin, a Nobel prizewinning economist, proposed a global tax on foreign-exchange transactions in 1972. The idea of skimming a tiny bit of revenue off the top of financial trades, and retrieving money for taxpayers from an industry that has benefited greatly from their largesse, has the ring of natural justice.

The rates proposed sound negligible, but the tax would be imposed at each point in the transaction chain. A 0.1% rate therefore translates into something much bigger as securities move from seller to buyer via financial intermediaries. Even the headline rates are less innocuous than they look. A 0.1% charge on repo transactions, a way for banks to finance themselves overnight, turns into a 25% charge over the course of a working year…

It goes on from there.

***

Rather than re-invent the wheel, allow me to summarize the point of the rest of this week’s article, which I did last year in June in the comments in this here blog.

Ok so now lets go to the next level with this financial transaction tax, which is supposed to magically reduce financial risk while plugging government balance sheets. If the tax is successful, then the types of transactions included in this tax will go down is the thinking. Except that what the types of transactions on which you could practically institute this tax is on the simple exchange of financial assets, which in of themselves are not risky. The true risky behaviour (eg. how much of financial assets you have on your balance sheet vs. your equity for example) which should be disincentivized by the government, will not be affected by this tax. On the other hand, if the market figures out a way to structure around the tax (rest assured we’re very good at getting around taxes), then not only will governments not have disincented risky behaviour, but the tax they thought they had to plug the gap will yield diminishing revenues over time.

***

The Economist now concurs. Here’s the closing line from this week’s article:

Finance needed reform, which is why new rules on capital, liquidity and derivatives are coming in. They should make the financial system work better. This proposal will not.

I suppose the Economist takes its time doing research before opining. Luckily, the denizens of this blog don’t mind offering uninformed opinions about what is wrong with macro-econ out of the blue.

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