Monday, July 18, 2011

Un Grande Ecole dit non au Financial Transaction Tax

I think that the proposed Tobin/Finacial Transaction Tax is a daft idea. My reasons are those of my gut, not pretending to be an economist. I think that it is anti-democratic in its construction, as it will allow the European Elite to set tax rates without any effective democratic oversight. It is also another tax that will hit consumers as the costs will be inevitably passed onto them in increased bank charges. And it isn't as if we are not Taxed Enough Already.

So it was gratifying to read this morning that others with bigger and pointier heads than I have come against the whole idea.

The École De Hautes Études Commerciales du Nord, or EDHEC as it is known, or more precisely the Risk Institute based there is one of the great Grande Ecoles of France. And it is pretty clear in what it thinks about the FTT. In a letter to the Commission they have put it thusly,
The findings of theoretical models are mixed about the effectiveness of the Tobin tax to reduce volatility and improve welfare. The Tobin tax will obviously lead to a reduction in the trading of securities on which the tax is imposed. But, a reduction in the trading of financial securities also means that it is now more difficult to smooth consumption over time and across states of nature. The Tobin tax reduces speculative activity in financial markets; but, this tax also drives away investors who provide liquidity, stabilise prices, and help in the price discovery process.
So according to EDHEC it fails even under its own light.

The market works by increasing information, the FTT would reduce information, leading to worse and more ill-informed decisions.

1 comment:

Anonymous said...

It would hit consumers in many ways but more important than bank service charges for day to day banking activity's, this tax strikes at the heart of us all.

A lender borrows from the interbank market over night to balance there books, the interest rate per annum is extremely low. Now apply a financial transaction tax (as it is a financial transaction) to a home owners mortgage per morning and night and the cost of borrowing goes up Massively,that cost will be handed to the consumer.

From the perspective of an institution that deals in the Forex markets, lets assume they take a position with one thousand contracts and intend to hold that position for 90 days.

With a financial transaction tax rate of 0.5%, a tiny tax that wont be noticed by any one according to the many charity's pushing for this, the institution faces a one million tax bill at the time of purchasing these contracts. Once daily the position is sold and re-bought instantly to roll it over which amounts to a two million financial transaction tax and again one million at the time of sale.

It now costs one hundred and eighty two million to hold that position for three months. Requiring a 182% return before profit levels are reached...I do not need to point out what is wrong here..many point out London as proof an FTT works yet they fail to recognize that 75% of transactions are exempt from stamp duty.

This tax would destroy London the Forex Market there is large and if this were to be implemented on a global scale it would simply stop the flow of money.

How is a market to transact trillions a day? Corporations to exchange hundreds of billions a year?