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Monday, 06 February 2012 15:13

Quite Simply Madness?

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At the Davos economic forum, Britain's Prime Minister David Cameron once again stated his lack of interest in an EU-wide financial transaction tax. But how crazy is the idea really?

For even a caring couple, close friends can sometimes be a challenge to the relationship. This happened once again to our favourite couple 'Merkozy' at the World Economic Forum in Davos where Britain's Prime Minister David Cameron publicly turned his back on their youngest baby: the introduction of an EU-wide tax on financial transactions.

As with most babies, you have to take a closer look to see why the parents love it so much: France and Germany have come a long way planning this child, starting in 2005 when Jacques Chirac and Gehard Schröder first considered putting charges on the sale of shares and derivates. The idea is not as complex as the tongue-twister might suggest.

There are no value-added taxes on securities, unlike for the trading of goods. So, while consumers pay an extra 15% to 27% on everything they buy within the EU, speculators get off at a rate of 0%. The introduction of a VAT-similar measure for financial transactions would eliminate these differences: each time a share, a bond or a derivate would be sold, a small percentage of the purchase price would go straight to the fiscal authorities. This would slow down short-term speculations: any good citizen tries to avoid taxes and the easiest thing to do would be to make more long term investments. That way, you would have to make less transactions and could avoid losing too much of your precious money to the state.

The tax could calm the hyperactive market, as it would be less profitable to make short-term, computer-based bets.

This tax could calm the hyperactive market, as it would be less profitable to make short-term, computer-based bets on minimal fluctuations. When it comes to the EU's current problems, this could especially help set limits to crisis-enforcing speculation on the development of currencies or states.

Not convinced of the beauty of this baby yet? The EU Commission seems to be: they introduced a proposal for a directive on an EU-wide financial transaction tax last autumn. The minimum rate is fixed at 0.1% for bonds and shares and 0.01% for derivatives. Sounds like small numbers? The Commission estimates revenues in the region of 55 billion euros. With a sum like that you can have Greece debt-free in six to seven years.

So why does Cameron risk yet another break with the couple from the continent? Britain's GDP depends highly on the well-being of the London stock market. The proposed tax would lower profits in London, and unless it was introduced worldwide, markets would shift elsewhere, to other trading hotspots. The Prime Minister might simply be frightened of falling from grace by laying hands on the financial sector.

On the other side of the Channel, Sarkozy has an election to win this year, as does Merkel in 2013. And though people are normally hardly interested in complex financial structures, a "gambler tax" which finally makes the "baddies" pay for the crisis seems to gain votes.

Against this background, there seem to be irreconcilable differences between the two sides. But some other important details shouldn't be ignored: in fact, Britain is much farther down the line in taxing brokers than France or Germany - they have had a tax on share transactions called Stamp Duty for more than 25 years now. But share transactions are only a minor part of financial trading and Cameron wants to keep the taxation that way.

Nevertheless, the history of Stamp Duty shows that a taxation on finance does not scare away all the investors. They have to stick around somewhere nearby because due to the time shift there will always be a third trading zone additional to America and South Asia needed in Europe. Obviously, a worldwide tax would prevent short-term speculations more effectively and leave no choice for the markets as to whether to pay for transactions. But as long as Europe closes ranks those trading in euro time would have to succumb to the tax as well. 

Thus, it might be "quite simply madness" to introduce the tax only in the euro zone, making Frankfurt lose its attractiveness, and allowing London to prosper if it does not accept it. But it could be quite sane to refinance the crisis debts by finally putting an all-European VAT on the products on the stock market. 

To turn this into a really effective measure it would be best not just to think EU-Europe: Zurich, as the the continent's third major trading centre, should be on board, too.

Taking this into account Merkozy still have some work to do to get their child through prep school. But if you now consider this baby rather adorable you don't have to fear for your sanity. After all, it doesn't seem like such a crazy idea.

Last modified on Tuesday, 07 February 2012 19:13

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