Taxation and Competitiveness 101

While most media hemmed and hawed Wednesday over Mario Monti’s new Italian cabinet, German and British politicians geared up for their own political spat, this one over the recently resurrected proposal for an EU-wide financial transaction tax. The UK’s been a fairly vocal opponent of the proposition from the start—not too surprising given its financial market’s size and importance to London and the country as a whole. And now, supporters have seemingly coalesced around German Chancellor Angela Merkel and the Christian Democratic Union, the leader of which said Wednesday the Brits must “do their part” to help support the European economy. In the Germans’ view, the UK can’t be “allowed” to simply be out for its own gain.

But in our view, the trouble starts with the dubious effectiveness of such a tax in the first place. First, it’s pretty easily passed onto consumers—meaning right off the bat the goal of “making banks pay” seemingly remains unfulfilled (unless by “making banks pay,” supporters mean decreasing banks’ business in participating nations, which is more likely—see point two below).

Second, it doesn’t seem an unreasonable suggestion companies uninterested in paying the tax (or having their customers pay it) can domicile their businesses elsewhere. And customers uninterested in patronizing European institutions charging higher transaction fees can similarly seek cheaper competitors. (All of which makes it pretty clear why President Obama recently firmly stated the US has no interest in participating in such a transaction tax’s institution stateside.)

But what strikes us as particularly odd about the Tobin Tax (as it’s commonly known) dust-up is the suggestion the country with overall more accommodative business conditions somehow “owes” it to the rest to handicap itself for “fairness’” sake. And fairness is seemingly at the tax’s heart: Because various European bodies—at both the supranational and national levels—bailed out financial institutions to varying degrees, some now argue it’s banks’ responsibility to repay the favor and happily pay the tax.

But we fail to see why Britain should want to knowingly institute policies aimed at reducing its financial institutions’ competitiveness—in fact, we’d argue Britain and its banks should be out primarily for their own gain and that of their customers and shareholders. Otherwise, their ability to stay in business likely diminishes pretty quickly, especially in the face of global competition.

In our view, what makes more sense is something of a race to the bottom wherein everyone boosts competitiveness by lowering whatever applicable barriers they reasonably can—be they taxes, onerous regulations, etc. Now, of course some regulations are necessary to ensure everyone plays by the same rules. But needlessly imposing transaction taxes, particularly when the effectiveness is dubious to begin with, strikes us as an odd way to spur the competitiveness of a region many would argue could use a boost in that department.

The whole debate harkens back to a similar European row this summer over Ireland’s corporate tax rate—when French and Irish politicians sparred over whether Ireland should “harmonize” (read: raise) its corporate tax rate to “even the playing field.” But as readers may recall, Ireland won that match, kept corporate tax rates low and has largely continued to recover from its recent debt woes just fine.

Who aces this edition of Taxation and Competitiveness 101 is anyone’s guess at this point. But hey, if the European contingent wins and the tax is imposed, we’re pretty confident there are a few institutions elsewhere—the US, Asia, the Caymans, etc.—more than willing to watch the EU and/or eurozone pile taxes on. It could well be the easiest marketing campaign they’ll never have to pay for.