Transaction Tax: Not Only Dumb, but Illegal As Well

EU Geniuses Decide to Do it Anyway

By Pater Tenebrarum

The European Commission's own legal counsel has just presented a 14 page long legal opinion that explains that the planned financial transaction tax is actually illegal as it "exceededs member states' jurisdiction for taxation under the norms of international customary law".

The EU's legal eagles did not mention that it is economic suicide as well, and that it may well be among the dumbest ideas ever devised by the continental EU's solvency-challenged socialists.

They've been warned by a number of studies that show that without a shred of doubt the economic damage this tax will wreak will by far outweigh the paltry tax revenues it is likely to produce. They should know from the development of the euro-dollar market that there was once a time when a stupid decision by a US government along similar lines resulted in the creation of this giant off-shore market in dollar-denominated financial instruments.

Last but not least they were warned in no uncertain terms by Sweden, which fairly recently introduced such a tax on its own with predictably disastrous results, forcing it to abandon it again post-haste.

Now they are informed it is not only excruciatingly dumb to do this, but it isn't even legal. Their reaction? “We'll do it anyway!” This is of course par for the course for this sorry bunch of bumbling bunglers. The idea behind the tax is allegedly to 'make the banks pay for the damage they have wrought'. The financial crisis has of course been blamed exclusively on the bankers, with both central banks and governments doing their best to look innocent – a task in which they have been greatly helped by the hordes of anti-capitalistic demagogues populating the media.

We certainly wouldn't want to exonerate bankers, many of whom have made what can only be called moronic decisions of monumental proportions, but it should be remembered here that the system that has made it all possible was set up with the full connivance of the body politic. After all, it has realized a long time ago how the practice of fractional reserve banking in conjunction with the cartelization of the banking system and the institution of central banks can be used to fatten the coffers of the State. There can also be little doubt that politicians facing elections every few years care little about the wasting of their nation's capital stock. One could not fail to notice that the main problem, the root cause of the boom-bust sequence, namely credit expansion ex nihilo, has not been deemed worthy of debate.

So are the banks going to 'pay their share' once this new tax is introduced? Even if one thinks they should be made to pay, the answer must be a resounding 'no!' They will simply pass the increased costs on to their customers. These are the very same tax payers many of which agitate in favor of this tax, misguided sheep that they are. It should be clear that as a non-connected citizen, one cannot improve one's lot by inciting the State to prey on others. In one way or another, one will end up paying for it.

From Reuters : 

“The European Commission rebuffed on Saturday an EU legal opinion that questioned the legality of a planned financial transaction tax and said work on the levy in 11 European Union countries would go on.

The legal services of the European Council, the institution which represents governments of the 28-nation EU, said in their 14-page legal opinion dated September 6 that the Commission's transaction tax plan "exceeded member states' jurisdiction for taxation under the norms of international customary law".

European Union finance ministers discussed the financial transaction tax briefly on Saturday, with the Commission saying there was a misunderstanding on the opinion.

"We are confident that the Commission's arguments and arguments of the legal service of the Commission will demonstrate very clearly to our member states that the approach which has been taken in the proposal is the correct one and does not breach any provisions of the Treaty," European Commissioner Algirdas Semeta, who is responsible for taxation told reporters.

Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia were planning to adopt the tax on stocks, bonds, derivatives, repurchase agreements and securities lending. Semeta said first reading of the proposal by the member states was already concluded.

"I believe that we will present arguments to our member states for the next meeting of the Council working group. So the work is in progress and I do not see any reasons to stop this work or to make some additional reflections," added Semeta.

Britain, the bloc's largest financial center, and 15 other EU member states refused to support the transaction tax proposal raising questions about how it would work with only some members participating.” 

(emphasis added)

It is quite amazing that the eleven nations involved are so persistent. Isn't the time when this nonsense could still be regarded as a potentially vote-getter long past? Because one thing is crystal-clear: it is once again a decision based purely on political considerations. In terms of economics, it makes about as much sense as jumping around barefoot on a board of nails. 

German Socialists Push for Tax

This morning the above news were supplemented with the following: “Merkel SPD Rivals Vow Transaction Tax Push in a Grand Coalition

“Delayed plans for a financial transaction tax in 11 European states would get a fresh push if Chancellor Angela Merkel enters a coalition with the Social Democrats after Sept. 22 German elections, top SPD members said.

The SPD will make the tax — known as FTT — a “high priority” if a so-called grand coalition emerges, with the intention of breaking a deadlock caused by squabbling over its scope, said Joachim Poss, the party’s parliamentary finance spokesman, in a Sept. 13 telephone interview. “It’s a project of central importance.”

The EU Commission, architects of the levy, say it may generate as much as 35 billion euros ($47 billion) annually. Implementing the tax was delayed six months to mid-2014 after its European Union proponents failed to agree on which products to exclude from dues and due to legal concerns. EU legal experts have said that applying tax to trades made outside non-participating states may be illegal.

Chances of a “far-reaching and damaging” FTT being introduced are higher in a grand coalition, a prospect that’s “insufficiently appreciated” by credit markets, Citigroup analysts led by Alessandro Tentori wrote in a Sept. 13 note. The SPD also champions a euro region debt redemption fund, a proposition Merkel rejects.” 

(emphasis added)

This is the same SPD that up until late last week categorically ruled a 'grand coalition' out. Like petulant children, the socialists demand to be handed the shotgun with which to shoot their nation's economy in the proverbial foot. They may be excused for being economically ignorant (otherwise they wouldn't be socialists), but this is a dangerous development. Please note the article mentions “the tax is expected to bring in €35 billion”. When it was originally mooted by the French socialists, they said it would bring in €160 billion! That's quite a comedown, but of course it won't even bring in the €35 billion. It will simply lead to most trading moving elsewhere, and to the extent that the EU members can enforce the tax outside of their home base (they may attempt to force the locals to pay the tax regardless of where they trade), it will simply put even more pressure on the already abysmally weak economies of Europe. 

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 Addendum: Sweden's Experience with the Financial Transaction Tax

Only two historical instances of financial transaction tax regimes have been studied thoroughly. One was the UK experience (however, there the tax was a very low 0.01% on equity trades and was later voluntarily abolished to increase the attractiveness of the UK as a marketplace) and the other one was Sweden's.

It is quite instructive to consider the points made regarding Sweden's experience which we found in a study that has been compiled for Canada's government, presumably to keep it from making a similar mistake. We quote: 

“In January 1984, Sweden introduced a 50-basis-point tax on the purchase or sale of an equity security. Thus a round trip (purchase and sale) transaction resulted in a 100-basis-point tax. The tax applied to all trades in Sweden using local brokerage services and to stock options. It did not apply to gifts or bequests. In July 1986 the rate was doubled. The next year, a tax at half the normal rate was also applied against trades between dealers. In January 1989, a tax on fixed-income securities was introduced.

The tax on fixed-income securities was considerably less than on equities, as low as 0.2 basis points for a security with a maturity of 90 days or less. On a bond with a maturity of five years or more, the tax was three basis points.

On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely.

There were several reasons for this change in policy. In the first place, the political climate in Sweden had shifted. The taxes were initially supported because financial transactions were viewed as destabilizing to the economy and as promoting excessive wage differentials. This latter point was distasteful in a society that places so much importance on income equality. The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kroner per year. They did not amount to more than 80 million Swedish kroner in any year and the average was closer to 50 million.

As taxable trading volumes fell, so did revenues from capital gains taxes, almost entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kroner by 1988.

Another reason for the reduction in capital gains taxes was the decline in share prices associated with the initial announcement of the tax and its increase. On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.

The Swedish system of taxes also played a very profound role in causing trades to migrate to non-taxed or lower-taxed jurisdictions. With the 1986 announcement that the equity tax would double, 60% of the trading volume of the 11 most actively traded Swedish share classes, accounting for one-half of all Swedish equity trading, moved to London; thus 30% of all Swedish equity trading moved offshore. By 1990, more than 50% of all Swedish trading had moved to London. Foreign investors reacted to the tax by moving their trading offshore while domestic investors reacted by reducing the number of their equity trades.

Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only three basis points. The volume of futures trading fell by 98% and the options trading market disappeared. Trading in money market securities, which faced a tax as low as 0.2 basis points, fell by 20%. This reaction was due in large part to the existence of a wide variety of non-taxed substitutes. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.

The Swedish results cited above are all consistent with those that economic theory would predict.” 

(emphasis added)

In other words, every single point we have made – that the tax creates so much economic harm that its net effect on revenues is likely to be negative, that it destroys the capital markets (note that some market segments even disappeared entirely!), and is all around harmful has been fully borne out by Sweden's experience.

And yes, the results are indeed 'consistent with what economic theory would predict'.