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BRITAIN’S attempt to stop 11 other European countries from adopting a financial-transactions tax (FTT) was blocked by the European Court of Justice this week on the ground that the objection has come too early, since the tax has not been finalised. The decision allows the countries concerned to continue negotiating it under EU auspices. Further legal challenges will doubtless be mounted, prolonging the battle between proponents of this “Robin Hood tax”—aimed at punishing the finance industry—and those who believe the EU is exceeding its powers by allowing a levy (imposed on every trade) that will have repercussions even in countries that do not participate.

In principle, there is no reason financial transactions should not be taxed: government revenues have to be raised from somewhere. Most Americans have to pay sales tax on restaurant meals and clothes; Britons pay value-added tax on e-books and petrol. If a particular good or service is exempt from tax, other items have to bear a higher burden.


The argument that an FTT will be passed on to clients undermines the Robin Hood element of the levy, since pension funds and retail investors will bear much of the burden. But the pass-through argument also applies to other levies. Taxes on corporate profits, for example, are passed on to consumers in the form of higher prices or to workers in the form of lower wages.

Nor is the argument that an FTT will restrict liquidity particularly compelling. Enthusiasts for free markets have turned liquidity into a bit of a fetish, using it to justify the activities of high-frequency traders, as highlighted in Michael Lewis’s recent book, “Flash Boys”. The idea is that more liquid markets reassure investors, because they can abandon their holdings with ease; the result is a lower cost of capital, which leads to more investment.

But there is no sign that the frantic activity seen in global stockmarkets in recent years, with trading intervals measured in milliseconds, has led to greater equity issuance, more business investment or faster economic growthquite the reverse. In a recent speech* to a Federal Reserve conference in Atlanta, Joseph Stiglitz, a Nobel-prizewinning economist, cautioned: “The fact there is more trading at some times does not necessarily mean that there is more liquidity when it is needed most.” The markets may be very liquid on an average trading day, but illiquid in a crisis.

Indeed, Mr Stiglitz argued that, if institutional investors believe that other market participants are better informed (because they have advance information on order flows, for example), they may be less willing to trade. “It would be an extreme example of the lemons problem. One would be constantly taken advantage of by more informed investors.”

The real objection to an FTT is a practical one. There might be a reasonable argument for a global FTT, if one could be organised

But since that condition is unlikely to be met, the FTT faces the crucial test of collectability. The great challenge for governments is globalisation: if people, money and goods can all move easily across borders, how does a country detain them long enough to collect a levy? The big revenue generators are income taxes, which are deducted directly from wages, and sales taxes, collected by the retailer. Both have proved pretty robust. Most people tend to stay in the country of their birth and buy their goods locally.

But the recent furore over the behaviour of multinationals shows that some taxes are easier to avoid. Profits are a subjective number, and the place where they are generated can be defined in various ways. With financial trading, it is easy to shift that business to Singapore or Dubai or wherever the tax does not apply.

The EU’s proposal tries to counter this by focusing on the domicile of those doing the deal. If a French or German bank is trading, the tax must be paid, wherever the deal is done. Without this rule, the business would have shifted to London.

But thisextraterritoriality”, while making the tax more likely to bite, means the EU’s role as a hub for global financial trade will suffer; Goldman Sachs’s New York traders must be rubbing their hands in anticipation. Already, the EU’s elite is having second thoughts. Christian Noyer of the Bank of France has said the tax would trigger the destruction of entire sections of the French financial industry, trigger a massive offshoring of jobs and so damage the economy as a whole.” Hardly what the continent needs.


* “Tapping the brakes: Are less active markets safer and better for the economy?” Financial Markets Conference, April 15th 2014