Fisher Investments Editorial Staff

A Confused Attempt at Compromise

By, 01/23/2012

“Clever and sensible.”

That was how German Chancellor Angela Merkel described Economy Minister Philipp Rösler’s talk of morphing the Franco-Prussian proposed EU-wide financial transaction tax on Friday.

The original plan, a 0.1% tax on stock and bond trades and a 0.01% tax on derivative trades, was seemingly motivated by eurozone leaders’ desire to hold banks accountable for aid extended during 2008’s financial crisis. (As EU Tax Commissioner Algirdas Semeta said in September, the tax would constitute, “A fair contribution from the financial sector.”) To them, banks played a big role in driving up eurozone deficits. And so they seek to recoup the funds. (And perhaps score political points through bank-bashing in the process.) But Britain quashed the EU-wide proposal.

Since the British rejection, EU leaders have been seeking new directions for the tax. French President Nicolas Sarkozy recently announced they might go it alone. But Germany still seeks a pan-European charge, and Rösler is attempting to get Britain on board through compromise.

Rösler suggests the EU shift its focus and adopt a plan akin to Britain’s Stamp Tax—a 0.5% charge levied on equity purchases. A higher rate, but assessed on fewer types of securities. And since the UK already has such a tax, Rösler’s speculation is they’re more likely to accept this. Maybe so. As yet, this isn’t an official German policy proposal, and the UK hasn’t publicly commented. Also, details have yet to be unveiled, but if it actually is similar to the Stamp Tax, this seems to us even more ineffectual than the original transaction tax.

Insofar as the plan targets increased revenue, we’re doubtful it would generate much of a windfall. Trades can be processed through any number of bourses, even for EU-listed securities. And implementing a tax having a global reach would be immeasurably complex. So it’s unlikely the tax would actually reap the revenue EU stamp tax proponents seek. In that way, the actual ineffectiveness would likely approximate the original plan. But the German compromise is not only unlikely to generate much revenue, the political motivation seems confused.

Whether or not you agree with the “fair contribution” rhetoric underpinning the initial proposal, at least it had a narrative. (Likely a pretty misguided one, considering companies often pass increased fees and taxes on to customers, but a narrative nonetheless.) And perhaps politicians could curry favor by claiming they’re taking banks to task. However, applying a stamp tax across Europe would seemingly lose even this meager reward in translation.

You see, the UK’s Stamp Tax is not a tax on financial institutions. It’s a direct tax on investors purchasing securities. In fact, a UK government website describing the tax provides a calculator so you (the investor) can easily see what you (the investor) will pay. So some questions: Can we agree European equity investors were not disproportionately responsible for eurozone government deficits? Then why target them specifically with a tax? What’s more, the idea of taxing folks who want to invest for their future—as though that’s behavior a government should discourage—makes little sense.

For even those who blame European banks for deficit woes, this new idea seems neither clever nor sensible. Should bank-bashing rhetoric give rise to EU-wide direct taxes on investors’ trades, we’ll bet more than a few European investors will wonder who’s getting bashed.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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