Good News for London and New York

Eleven euro states back financial transaction tax | Reuters.

A financial transactions tax is a bad idea. The politicians are running out of money to keep the euro welfare system together, and people resent the banks’ and hedge funds’ large profits and dodgy behavior. The EU is combining both facts into a financial transactions tax that appears to punish banks and hedge funds while increasing revenue.

The problem is that this is the 21st Century, and if you tax holdings in cyberspace these assets will move at the stroke of a key to an untaxed jurisdiction. All of the large banks have operations around the globe. If a tax is levied on a derivative transaction in Berlin, you can just perform the transaction in untaxed New York or London.

The nations proposing this tax claim it will raise €57bn in revenue while reducing volatility due to decreased transactions. The tax will fail on both counts.

The tax will miss its revenue projections as more business is moved from the taxed jurisdictions to untaxed havens. Since this business will be moved to other jurisdictions, so will the attached high-paying financial services jobs. The eleven countries will also miss the tax revenue generated from these jobs.

Volatility will not be reduced either. The transactions will still take place just in different locales. Furthermore, the bifurcation of the EU into transactions taxed and untaxed areas will increase volatility by creating two smaller markets rather than one large one.

Another overlooked fact is that everyone will be paying this tax. It’s easy for Deutsch Bank to move assets around the globe, but Johan, Jean, Juan and Giovanni will have no choice but to pay the tax whenever they buy or sell stocks and bonds. A tax that is meant to punish institutions will instead punish regular people.

Note that Spain and Italy joined the group of 11 late. The Germans applied “diplomatic pressure” to obtain their acquiescence to the measure. You can bet that the switch has everything to do with the German pocketbook. This action will only add to the periphery’s resentment of Germany.

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