Call it whatever you like, but a financial transaction tax is bad news
They also havent decided what will be covered by the tax. Equity trading will almost certainly be included but potentially not the shares of smaller companies; derivatives probably will be and bonds might be.
They also dont know who exactly will pay the tax, who will collect the tax, what impact the tax will have on economies or how countries not implementing the tax will be compensated for enforcing it in their jurisdictions. You see, although the levy will apply to eurozone securities it will do so wherever in the world they might be traded (otherwise theres a risk that the market for, say, Italian equities would just shift to, say, London). But that also means that a US hedge fund trading a European equity-linked derivative in Hong Kong would be liable. And that might be quite tricky to police.
Whats wrong with the financial transaction tax? How long have you got? It will almost certainly lead to a slump in trading volumes. Thats what happened when Italy introduced its own version in March 2013, meaning that estimates about the amount of revenue the tax would raise proved to be hopelessly over-optimistic. And less trading generally equals more expensive trading.
But thats fine because the tax will only hit those nasty old banks, right? Hardly. Banks are agents. For the most part they are trading on behalf of their clients. And their clients are companies and investors. And those investors are pension schemes, which means, of course, that they are you and me.
Many in the City seem to assume that the financial transaction tax is so patently wrong-headed and the difficulties in implementing it are so vast, that the proposal will quietly be watered down. And, certainly something like that happened in France.
Franois Hollande was elected on the back of a number of populist policies that included the introduction of a financial transaction tax. But once in the lyse Palace he started to see things a little differently.
The French, you see, are very good at maths. They have won more Fields Medals, which is like the Nobel prize for maths, than any other country apart from the US. Why is this relevant? Well, it means that French banks are very, very good at derivatives trading. Its close to being one of the countrys last national industries.
Once this was pointed out to the new president, pragmatism body-slammed ideology and Mr Hollandes much-trumpeted financial transaction tax ended up being even more limited in scope than the UKs stamp duty on shares.
Nevertheless, France is still pushing for a eurozone-wide version. And so, in particular, is Italy, which currently holds the rotating presidency of the Council of the European Union. Perhaps, having already introduced their own levies, France and Italy are determined that all of their neighbours are similarly handicapped. Germany is, as you might expect, a bit more lukewarm about the whole thing.
Those who bet that the financial transaction tax would quietly be brushed under the carpet have so far been frustrated. Its unlikely that anything concrete will emerge from next weeks meeting. But its worth remembering that many in the financial industry also thought that short-selling rules and the bonus cap were too far-fetched and self-defeating to ever be implemented. Right up until the point when they were.
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Call it whatever you like, but a financial transaction tax is bad news