EU Financial Tax Portends Loss of Market Leadership
Although it was barely noticed by the American press, on January 22nd, EU finance ministers approved a new "Financial Transactions Tax" (FTT) that has implications for market competitiveness around the world.
The move was conceived as a Franco-German initiative and was supported by seven other EU nations, including the entire bloc of highly indebted southern tier nations, to reach the minimum nine nations required to press ahead under the EU's so-called 'enhanced co-operation procedures'. If at least one of the transacting parties involved is an EU resident, the tax will impose a one-tenth of one percent tax (on both sides of a financial transaction) on secondary market trades in equities, bonds, securities and REPOS. Derivatives will be taxed at a lower one-hundredth percent.
Although limited presently in scope and at an apparently low rate, the tax will nevertheless provide an extra layer of financial bureaucracy that will dissuade some market participants from transacting in the Eurozone. It should be patently obvious that transactional fluidity is supportive of efficient markets and ultimately of economic growth. It is only in the poisonous, anti-capitalist, post-crisis environment that such a measure could be passed. More importantly, the measure is a "supra national" tax that helps to pave the way towards a global taxation system. Not only will such a system be economically damaging but it will be devoid largely of effective democratic accountability.
In its March 2011 tax meeting in Brussels, the EU had originally proposed a "Financial Activities Tax" (FAT), a more comprehensive, and potentially more destructive, EU-wide measure. The opposition to the tax was so fierce, most notably from Great Britain, that the FTT was proposed as a compromise.
Ignoring the role of the central banks in the financial debacle, the German Finance Minister commented lamely that, "The financial sector must appropriately participate in bearing the cost of the financial crisis." According to the EU's Tax Commissioner, Algridas Semeta, the FTT decision was a "major achievement for EU tax policies." Those who believe, as I do, that the EU's covert intent is to erode the traditional independence of the world's financial markets, particularly the dominance of London and New York, certainly share those sentiments.
In an economic impact analysis running to over 1,000 pages, the EU Commission estimated that the FTT would raise $76 billion annually. The commission admitted that this would cause a 10 percent drop in securities transactions, a 70 percent fall in derivatives trading and result in a loss to the EU's GDP of some 0.53 percent. All this in an EU economy struggling now to prevent a recession falling into a depression! Of course, the Commission failed to consider any resulting lost tax revenues implied by a fall in GDP.
On its face, it was clear that the idea for both the FAT and the FTT was a product of left wing ideology of soaking the so-called rich, but devoid of any real understanding of how free markets operate.
If such a tax were imposed in a single country market, in the UK for instance, it would encourage a massive flow of business to other national markets. The EU must feel that its size and status will protect it from such an eventuality. Few suspect that the FTT will offer economic benefits that would outweigh the harm it will impose. But that is not the criteria by which the measure will be judged by EU leadership. What if FTT is designed not as a tax to encourage more responsible investing, but as a covert weapon to win political control of Europe?
FTT is a supra national tax imposed on top, and independent of, national financial taxes. Once the infrastructure to enforce and collect the tax is established, the tax rates can be raised relatively easily. Most importantly, once such supra national taxes are established, they suffer from very little if any democratic supervision.
EU Tax Commissioner, Algirdas Semeta, has said that the Commission has arrived at a means of levying a tax that prevents investors from relocating. The tax will be imposed on both the buyer and the seller of a financial instrument so long as either of the two parties is based within any participating EU country. This means that even investors in London or New York accustomed to paying only their domestic taxes may not escape the new tax completely.
At a time when governments should be encouraging the free flow of capital, this measure moves us exactly in the wrong direction. Combined with the heightened regulatory scrutiny in the United States (President Obama's appointment last week of the first former federal prosecutor to head the Securities and Exchange Commission), the move bolsters the belief that the West will likely cede financial market leadership to the freer and more vibrant markets in the Pacific.
John Browne is a Senior Economic Consultant to Euro Pacific Capital.
Posted by mava on 01/31/13 09:51 AM
Keep the ball in their field. Let the government worry about the reason you stopped funding. Let them figure it out what they need to improve to get the donations flowing again. Is it the lack of accountability and transparency? Is it...
Posted by mava on 01/31/13 09:47 AM
I agree, nailheadtom!
I want an accountability only as long as I have no choice and am always forced to feed the government.
But, what I really need is not accountability, - please, spend that as you see fit, but a choice in supporting the Washington or not.
For example, do I care about an accountability of a casino in Las Vegas? No, I do not! Why? Because any time I even suspect that there is something I don't like, I stop spending there!
I do not see why the government should be in any better position.
We should receive a funding form, instead of taxes every year. On that form, you should be able to check any number of boxes and put an amount you wish to donate next to them. So, in total, your for can have 0 or whatever the amount you want to waste. But, it can never be negative.
And so, if you want the welfare, - you donate to welfare, and your total amount donated will determine your level of payments if you need them. If you want NASA, you donate to it, and you get the pictures of Mars for free, while I would have to download them from Torrents (oh, horror).
If you believe, in your heart, that a thieving gangster in Washington needs to "RIDE" in a tinted vehicle, then you check that box and pay for it. Personally, would never ever check anything in that area, but, this is your choice.
You make it how you want it. And you can submit a suggestion, and next year there will be a check box for a Government Accountability Office, - go ahead and donate to that.
But I? I am perfectly satisfied by cutting my funds off immediately, when there is something I don't like.
Posted by WorkingClass on 01/31/13 04:14 AM
Does the FTT apply to high frequency trading? I would suggest that HFT presents a greater threat to free markets (which in any case do not presently exist) than does FTT.
Posted by nailheadtom on 01/30/13 06:32 PM
" Not only will such a system be economically damaging but it will be devoid largely of effective democratic accountability."
Huh? Is there some democratic accountability now? Has there ever been? Why should there be? Democratic accountability describes a direct vote by all citizens on this sort of thing or implies that it's a response to the majority as determined by their elected officials, ie. more statism. Enabled by more taxes.
Posted by taxesbyanyothername on 01/30/13 04:08 PM
I have to agree with Mava and Danny. We have so far down left to go that guessing how bad the bottom will be, is just that, guessing.
Posted by nailheadtom on 01/30/13 10:40 AM
It won't be long and registration of all financial exchanges, even those already covered by sales taxes, will be required and a fee charged for the enforcement of contractual obligations. For instance, the purchase of an automobile through monthly payments will require a fee that would ostensibly guarantee repossession in event of non-payment. A contract to build a house or provide life insurance would face the same mandate.
The voracious state is dedicated to the maximum exploitation of its subjects.
Posted by Danny B on 01/30/13 10:37 AM
As usual, I agree with Mava. This has just begun and we're currently in denial.
Forbes has a great graph comparing the tech-bubble to the housing-bubble to the bond-bubble.
Click to view link
The bond bubble crash isn't going to be near so benign as the tech bubble.
Click to view link
Everything is so integrated that it all collapses together.
Posted by mava on 01/30/13 02:50 AM
"It is only in the poisonous, anti-capitalist, post-crisis environment that such a measure could be passed."
Post crisis environment?
With all DUE respect, you've must have misspoken. We have barely even started on the "crisis" road. No way anywhere near the half point. I mean, seriously? There was virtually no pain yet, no loss, no problems, only scare. This is not a crisis.
I would say this if I was asked to estimate how far in in the coming crisis are we: Say the life story ending in suicide of Adolf Hitler was his personal crisis stage. Well, then where we are in it right now is approximately when Adolf got rejected by an art college. I am sure this seemed like a big crisis to him as well, until he found himself within his home nation laying destroyed, a multitude of irreversible acts done on his command, and a barrel of a gun at his temple. I don't think he had even entered the art college into any consideration at that point, at all.
Similarly, we have sustained zero damage so far. What? Some people lost their jobs? When we are through, more that a half of the world as we know it wouldn't even exist anymore, - it will lay in smoldering ruins.
Again, the only way I can explain this is that you did not mean to say that.
Posted by SoundMoney on 01/30/13 02:28 AM
Given the current state of the financial markets, encouraging that circus to go elsewhere is a very rational behavior. That said, I greatly prefer competitive free markets to what currently exists. For instance, to invest in stocks, I require a market free of naked short selling with publicly available order queues and limit orders, and would welcome an exchange that meets these requirements.