Fisher Investments Editorial Staff
Geopolitics, Taxes, Developed Markets

This One Goes to 11

By, 10/10/2012

The EU’s proposed financial transactions tax reared its ugly head again at the EU finance ministers’ meeting Tuesday, when 11 nations agreed to pursue it.

The tax was a hot topic earlier this year, but chatter quieted when the UK and Sweden blocked its EU-wide implementation. But France and Germany persisted, and they’ve secured enough participants to push the tax through the EU’s “enhanced cooperation” loophole, which allows smaller groups of member-states to enact (supposedly) trailblazing common legislation. Austria, Belgium, Greece, Portugal, Slovenia, Italy, Spain, Slovakia and Estonia all signed up.

We continue to believe a financial transactions tax is a solution in search of a problem. It probably won’t raise much revenue, considering financial activity likely migrates a fair bit to tax-friendlier shores like London, New York, Hong Kong and Singapore, limiting the tax’s total take (and, likely, denting economic growth a touch). The UK opted out for this reason, as did Sweden, which learned the tax’s unintended consequences the hard way in the 1990s.

Then again, the tax’s primary aim seems to be curbing alleged financial sector greed—making “markets pay for decades of excess” and reclaiming banks’ “gargantuan profits,” as one news outlet put it. This is a misguided pursuit, in our view. For one, banks are hardly raking in money hand over fist these days. Even if they were, profitable banks aren’t a societal ill—rather, they’re the banks best able to serve their primary purpose of efficiently allocating capital throughout the private sector. That’s a societal good. Moreover, the banks themselves wouldn’t pay the tax. They’d pass it to consumers: pensioners, depositors and individual investors. We rather doubt EU leaders truly want these folks to pay for the financial sector’s alleged excesses.

That said, several hurdles remain in the tax’s way. A qualified majority of EU nations must approve the initiative, and some officials have suggested their support won’t be easily won. Most importantly, participating nations must write the actual rules. They’ve agreed on the idea in principle, but not on even its basic provisions—including the tax rate and which transactions or products it will apply to. The European Commission’s earlier proposal outlined a 0.1% levy on stock and bond transactions and a 0.01% surcharge on derivatives and foreign currency transactions, but this remains up for debate. The scope is also unclear: Will it apply only to hedge funds and banks’ proprietary trades—the most often cited targets—or will it be a stamp duty on all trades, including retail investors’? And there’s no agreement on where the revenue will go. France wants it to fund the European Commission’s budget, but Germany wants national governments to collect and spend it as they see fit.

Germany’s EU ambassador claims the 11 participants will overcome these differences and present a concrete proposal to the European Commission in November. Perhaps they do, though given EU leaders’ penchant for politicking, quick agreement seems unlikely. If they do push this through, its broader capital markets impact seems limited considering how much EU financial activity already takes place outside the tax zone—roughly three-fourths in London alone. But if they dither and let the proposal die on the vine, that’d be fine with us—and likely to their long-term benefit, considering potential unintended consequences.

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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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