TOBIN TAX AND ITS IMPACT ON TAXING OF TRADES Doubts have been cast over the future of a Tobin tax on Europe's financial markets after British prime minister David Cameron vetoed an EU treaty that would have included a financial transaction tax.
The move has widely been welcomed by the City, but if it does make its way into EU law – and indeed in the US as well – what will its impact be on trading? Nicknamed after Nobel prize-winning economist James Tobin, who suggested the introduction of a small tax on currency market transactions in the 1970s, the modernday tax would largely discourage high frequency trading in Europe and generate funds for the debt-ridden EU. Mr Cameron chose to veto the tax during European crisis talks in early December, claiming that it would drive business out of the UK and towards America and Asia. It would have seen a 0.1 per cent levy on shares and bond trades and 0.01 per cent on all derivatives. "We want the Eurozone countries to come together and solve their problems," he said. "But we should only allow that to happen within the EU treaties if there are proper protections for the single market, for other key British interests." Angela Knight, chief executive of the British Bankers' Association, told the Evening Standard that an EU-wide Tobin tax "would have had a disproportionate impact on the UK as it is Europe's biggest financial centre". Also arguing against the tax is Stuart Fraser, policy chairman at the City of London Corporation, who told the news provider that it would have acted like a tax on the UK, noting that the European Commission's impact assessment showed that of the €57 billion (£48.6 billion) it would raise from the tax, €40 billion would have been from the UK. "The Commission also highlighted that between 70 per cent and 90 per cent of all derivatives trading could move outside the EU, together with hundreds of thousands of jobs," he added. "Driving that volume of internationally mobile business outside Europe would have defeated the whole purpose of the Tobin tax." Chancellor of the exchequer George Osborne also promised in his Autumn Statement that the City would be protected by the tax, arguing that it is a "tax on people's pensions" and not one on bankers. Instead, Mr Osborne introduced a permanent bank levy of 0.088 per cent from January 2012 in order to put some restrictions on trading.
Indeed, according to an economic sub-committee of the House of Lords, the tax could cost Britain's economy up to 20 times the amount it raises. Forbes' Tim Worstall stated that the levy could act as a tax on consumers and workers, will increase price volatility in the markets and will not even raise any money. While the debate continues in Europe, the Tobin tax could also be introduced in the US. Critics there, most notably the Congressional Budget Office, have also warned that it would send traders out of the country to markets that do not impose the fees. Writing a blog for the Wall Street Journal, Jason Zweig claimed that high frequency traders will be the first people to head overseas. "After all, in a world of instantaneous electronic trading, buyers and sellers will immediately transfer their activity to the venue with the lowest cost of buying and selling," he noted. "Capital will flash away to wherever it is taxed the least." He cited similar taxes in the past, including an 1863 tax on speculative trades in gold, which have only gone on to either humiliate Congress or have no effect on speculative trading at all. Another problem that could arise from the Tobin tax, Mr Zweig suggested, is that by reducing trader's net profits, they will only go on to trade even more in order to generate the lost revenue. "There may be too much trading too fast, and governments may need to find new ways of raising revenue. But a transaction cost is unlikely to help, and it will probably hurt," he argued. Governments are desperately attempting to consolidate their budgets, however, and while they might come to regret it, a financial transactions tax is inevitable.
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