Tax: Concerns cast on Europe-wide financial transaction tax

French President Sarkozy and German Chancellor Merkel

French President Sarkozy and German Chancellor Merkel

The idea is an attractive one and one that is lingering: Forcing a tax on the high number of financial transactions which are hanging around in the global economy.

Taxpayers looking for scapegoats

The proposal was put back to the top of the political agenda during the week when French President Nicolas Sarkozy and German Chancellor Angela Merkel met to pitch a Europe-wide tax as the main part of the solution for the continents worsening debt crisis.

Those in favour of the tax are arguing that it could raise approximately $280b a year, and that it would stop speculators. The tax they say would help those countries struggling with debt balance their budgets which will assist with the bailouts of Greece, Ireland and Portugal.

The reality is that a financial transaction tax would make many happy due to the growing feeling that bankers, who are responsible for the financial crisis, need to be punished and these would be the target as taxpayers are looking scapegoats.

Escape the tax

Here is the main problem, all of the world’s major financial centres would need to be involved with the scheme. Because if they are not then trading activity will simply move into the lower-tax jurisdictions. The problem is traders are very shrewd and they could simply invent new financial instruments that allows them to escape paying the tax.

The other issue is that the markets where the tax is collected, having the tax involved means that liquidity could be reduced turning the market into an illiquid market and thus amplifying the volatility. The volatility is what the policy makers want to avoid and it would not be a move forward if the proposed move forward simply takes them further back.

Dan Ciuriak, former deputy chief economist at Foreign Affairs and International Trade Canada said: “Government must be seen to be dealing with their fiscal problems by taxing the parties that created them. But if it’s theatre, it doesn’t go anywhere. It’s part of the buzz for a while, and then it falls.”

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