Home Platforms, brokers, legislation, commission, and slippage Implications of A Financial Transactions Tax (Why It’s A Bad Idea)

Implications of A Financial Transactions Tax (Why It’s A Bad Idea)

Source: www.sxc.hu

(This piece is a rewrite of what I sent to several newspapers before Christmas 2011)

The European Commission has suggested a ”banking transaction tax”.

In November 2011 they asked the representatives at the Council of the EU to express clear “support for the shift of tax burden from low-income population to the financial sector”, according to several news sources.

Jose Manuel Barroso, the former communist and now the very powerful and unelected leader of the EU Commission, is arguing very hard for this tax, along with France and Germany. The Commission wants this tax to fund the Commission’s budget. Now that France has just elected a socialist president, it will be interesting to see how this tax develops.

The ramifications of a financial transaction tax (FTT)

A financial transaction tax (FTT) is very popular among the public. That’s easy to understand since hardly anyone understands how far-reaching and destructive this tax is. So let’s look at it more deeply:

The Financial Transaction Tax is not a banking tax

First of all, this is not a banking tax. Everyone has to pay the tax, both you and me and the banks. The banks will also collect our FTT. The politicians have tried to camouflage this as a banking tax, but it will be paid by everyone doing financial transactions. Of course, all costs in doing business will be borne by the end-user/consumer. Anyone telling you otherwise is not telling the truth.

The Financial Transaction Tax is not minuscule

Secondly, isn’t the tax just a proposed minuscule 0.1% on stock trades and .01% on derivatives?

Bear in mind this will be paid by every transaction either you make money or lose. Indirectly you pay this tax through your future pension. A tax on transactions will also mean a lot less liquidity in the market. When you buy you have to pay more (than without a tax) and when you sell you receive less because of less liquidity.

A Financial Transaction Tax means less for pensions

There will be fewer buyers and sellers (the tax increases the costs and thus more risks involved). That in turn will have a much bigger impact on the costs than the tax itself.

Let’s do a simple calculation of what this will mean for your pension: if all your pension is placed in the stock market (all pension funds has a substantial part in the stock market), and the fund turns the portfolio 0.5 times a year, this means 0.1% in costs per year. Add to that at least 0.25% more in costs involving the actual buying and selling (the invisible cost due to less liquidity, but still a proven scientific fact). That means in total 0.225% per year in costs.

Thus the FTT would lead to a 7% lower pension if you save over 30 years. Instead of receiving 300 EUR a month, you’ll receive 273. Think about that! This “minuscule” tax is not so minuscule after all.

According to Vanguard, a US money management firm, the FTT will be a lot costlier than my calculations, up to 1% less return yearly. That is 5 times more than my calculations!

Third, probably the market makers will get an exemption for this tax to avoid the markets “drying up”, just like in the UK. And who are the market makers? Of course, the banks.

Other countries welcome an EU Financial Transactions Tax

And fourth, among the G20 countries, there are more countries against this tax than for it. Singapore, just as an example, would welcome the EU to implement such a tax. Why? That means banks, funds, and people could relocate to Singapore and avoid the tax. That means less business and capital for the EU and more for Singapore. A recipe for EU slow growth (as usual).

Costs related to a Financial Transactions tax

Imagine the management costs also associated with this tax as well: accounting systems, tax lawyers, and collecting. Even the EU commission has acknowledged the FTT will cost much more in lost productivity and GDP than it gets in tax collection. Their “impact assessment report” says the GDP will contract up to 1,8% of GDP, or an annual 221 billion EUR (later they have revised this downwards – probably to make it more appealing).

The Financial Transactions Tax raise peanuts in taxes

The FTT will only raise a projected 57 billion EUR. In other words, the FTT will cost 4 times more than the income.

Sweden implemented an FTT in the ’80s with catastrophic consequences: close to 85% of trading moved abroad and capital gains taxes plummeted drastically. In the end, they found out this was a very expensive tax. Sweden expected to collect 1,5 billion SEK, but instead only fetched 50 million SEK a year. Sweden’s finance minister, Anders Borg, said the following:

……we have substantial evidence…And from the Swedish perspective, we cannot foresee that we would introduce such a tax system again.

Who receives the tax from the Financial Transactions Tax?

Lastly, who will be receiving this tax? The bureaucrats and politicians want your hard-earned money badly. They want us to pay a transaction tax directly to their budget.

This means that taxation issues are no longer a sovereign matter. Quite scary, if you ask me. Also, the EU Commission has now asked the EU-countries for more funding. While the rest of the EU is implementing austerity, the bureaucrats in the Commission want to increase their budget!

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