Germany wrong on financial transaction tax

In the midst of a eurozone sovereign debt crisis – caused largely by government profligacy – it is not surprising, but it is regrettable, that the German Finance Minister should call for more financial regulation and a transaction tax. It seems that the European Union elite want to use the financial crisis and its aftermath to do everything they can to centralise further power within Brussels. If it were the case that the financial crisis had nothing to do with regulators and central bankers, and if it could be shown that increased levels of financial regulation would prevent such crises happening again, at least the finance minister might have an arguable case. But, not only were international financial regulation, government policy failures in the United States and mistakes by central bankers very much causes of the crisis; the current problems in the eurozone surely shows the folly of responding to state failure with more government regulation and taxation. These proposals are diversions from the main issues and fundamentally misguided.

With regard to the transaction tax, there is no evidence that a transaction tax would achieve its desired objectives – although, there is much evidence that it would be highly damaging to liquidity, raise costs for end consumers in financial markets and damage economic growth. Indeed, even the EU’s own estimates suggest a 1.8 per cent drop in the value of economic output from such a tax. And it is highly doubtful that it would raise much money. It is commonly argued that a transaction tax would stop harmful transactions and ensure that finance served the common good.

This is entirely wrong. A transactions tax would actually weigh more heavily on primary equity transactions than on derivatives. In general, a transaction tax is a terrible idea for voters – but great for politicians. It is literally impossible to work out who would actually bear the underlying pain from a transaction tax. Would it be workers, banks’ customers, pension fund members or bank shareholders? We have no idea – though it is very unlikely to be banks’ senior managers, who seem to be the main target of the wrath of the proponents of such a tax.

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Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

1 thought on “Germany wrong on financial transaction tax”

  1. Posted 02/11/2011 at 09:14 | Permalink

    I see that the Archbishop of Canterbury has joined in by endorsing a tax in today’s FT. The C of E is now officially Guardian Readers at Prayer.

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