The Transaction Tax That Never Was, Never Will Be

The ‘Tobin tax’ — the EU’s proposed tax on financial transactions named for the American economist who advocated taxing currency trades in the 1970s — looks increasingly likely to be stillborn. It will be politically hard enough within the EU to get all member nations to agree to it, regardless of its populist support in France and Germany. The UK has already set its face against it, unless it is implemented globally, which is even more improbable than it being accepted in Europe. The US, Singapore and China won’t readily throw away a windfall gain in competitiveness for their financial centres viz-a-viz London. And London knows it. A classic Catch-22. The lobbyists won’t even have to work that hard to scupper the proposal.

The details of the tax that will never be are as follows: The EU wants to introduce it in 2014, at a rate of 0.1% on the exchange of bonds and shares and 0.01% on derivative contract transactions. It would apply when at least one party to the transaction is located in a EU member state. We can only imagine that there would be a boom in transaction tourism to offshore havens.

Another reason the tax will be still born: though the EU Commission reckons that the tax could raise 57 billion euros ($77 billion) a year for EU governments’ coffers (the EU would set a base rate that national governments could top up), it also estimates that it could cut Europe’s long-term growth by more than 1.7% of GDP. That loss of growth would be the price for eliminating what the Commission reckons would be 90% of the derivatives transactions in Europe. Yet in today’s global markets, the business might disappear but not the risk. That would be a hard sell even for cash-strapped euro-governments.

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