“Tobin Tax” is a step backward for financial markets
–Tanuja Randery is the CEO of trading services firm MarketPrizm. The opinions expressed are her own.—
As the economic downturn continues to drag on, the cynics amongst us might be forgiven for thinking that the “Tobin Tax” is a move by politicians to curry public favour by taking punitive measures against the financial services sector.
On 14 February, 11 out of the 17 euro zone nations agreed to implement the Financial Transaction Tax (FTT), a tax on bond, equity and derivatives transactions, in January 2014. Two countries have already rolled it out — France, last August, and Italy, which followed suit on 1 March this year. The UK, Netherlands and Sweden are all strongly opposed.
On the face of it, the FTT appears small — 0.1%. However, the tax is cumulative and cascading, affecting a chain of trading and clearing including vendors, brokers and clearing members. Each sale along the chain will be taxed. Also, the tax will be levied on any bank registered in a country that does apply the tax, even if the transaction takes place in a country that hasn’t implemented it. This means that if a UK bank does a trade with an Italian bank, they will be taxed twice, with both the UK’s domestic stamp duty as well as the FTT.
For European banks in particular, who are already struggling with reduced liquidity, layoffs and other headaches, putting a tax on trades appears misguided to say the least, especially if it disadvantages a stagnant euro zone by causing traders to eschew European securities markets in favour of the US or Asia.
Since the introduction of the tax, French market share of European trading has fallen to its lowest level since 2008, standing at 11.88% in January 2013, down from 17.3% in 2011. A study of previous FTTs found that they tend to harm market quality, by increasing volatility, reducing volumes and raising the cost of capital — the very things which the FTT is meant to address.
Supporters say that the tax will raise billions; however, the reality is that the cost of issuing securities is going to go up, which means capital-raising and investment levels will fall. Banks will inevitably have to pass these costs on to consumers in the form of higher prices. This will result in a negative impact on pensions and other vehicles, as the tax will be deducted from the investment.
Far from being a revenue generator, the FTT could turn out to be a millstone around Europe’s neck.