Questioning the Transaction Tax

Tuesday, the EU parliament adopted the French-inspired, British-despised financial transaction tax, a small fee on stock, bond and derivatives transactions conducted by a host of finance industry-related firms. Scheduled to go into effect as early as 2015, the measure’s esprit de corps is to “make banks pay” for EU backstops and bailouts created since 2008. Including France, nine other eurozone countries have come out in strong favor—believing it might “bring a fairer distribution of the weight of the crisis.”

Lucky for England (and perhaps a few other countries), the tax is not binding across the EU. But pan-EU or not, the tax conceptually seems a bit misguided to us in the first place. Why any country would adopt a tax creating more of a barrier for business than their peers or increase customers’ costs (many Financials companies would likely pass the fee along to customers) is beyond us.

Moreover, in growth and competitiveness-troubled Europe, enacting barriers and making it more difficult to do business seems a bit of a folly. For example, it seems likely companies uninterested in paying the tax in their home country could domicile their businesses elsewhere. And citizens uninterested in patronizing European businesses charging higher transaction fees could merely take their business elsewhere. Recall the principle: Tax something and you tend to get less of it. So tax financial transactions, and “you” get less of them ... and it’s likely some other country/company gets the balance.

Of course, some argue the cost companies would incur actually moving to a country that didn’t impose the tax would outweigh just paying the tax—so, many are likely to pay without fuss. Maybe. But, however nominal the tax now, companies might see it a slippery slope to even higher taxes later. (Wouldn’t be the first time.) And that begs another question: If the tax’s proponents feel it’s so nominal, what’s the point of levying it in the first place?

It seems to amount to a question of fairness—again, making banks pay up for what policymakers see as past services rendered. We at Fisher Investments are not in the weighing “fairness” business, so we’ll not opine on the rightness of one government asking another to enact a tax on that basis. (Then again, governments have historically shown themselves to be less than perfect “fairness” arbiters, too.) Economically, though, better to stoke eurozone growth now by encouraging business and investment than chill it by levying vexing taxes. But, given the tax is fairly small (right now) and countries can opt out (hopefully more do than less), it’s likely only a small, incremental negative for the eurozone. And over the last three years, the eurozone has shown an incredible resilience to muddle through far more onerous issues than this.