Eleven European Union countries are pushing hard to implement a proposed financial transactions tax that would tax stock, bond and derivative trades, and perhaps currency exchanges. It’s a very bad idea, but that doesn’t seem to matter much to the EU.
It’s true that the proposed tax is low: 0.1 percent on stock and bond trades and 0.01 percent on derivatives trades. But even low rates can add up when the trades are large or when people or institutions trade frequently. Initial estimates suggest the tax would rake in about $45 billion a year, but such estimates are usually wildly optimistic.
Of course, EU citizens still have to pay taxes on their profits from their trades, so the financial transactions tax is a kind of double taxation.
Defenders claim one purpose is to discourage “speculation.” But what exactly is speculation? Everyone who invests in stocks and bonds hopes to profit from buying and selling the instruments. Some may hold them a day, others a month and others a year or more—and some do all of the above concurrently. Which one is the speculator? And if the government can’t precisely define speculation, how can they control it?
The other stated purpose is to recapture some of the money used to bailout financial institutions in the recession. But a transaction tax could ultimately reduce total revenue rather than increase it.
If people and institutions decide to hold on to their stocks or bonds longer—which is one of the goals—that would delay any tax revenue the countries hope to collect. Which highlights perhaps the biggest problem with the proposal: All taxes distort economic decisions because people are factoring in the impact of the tax.
Ironically, the EU’s effort is counterproductive to its own economic stimulus goals. EU countries are obsessed with the Keynesian notion that government must prod increased consumer demand. But for consumers to spend more, they need to have the cash. Yet the EU wants to impose a tax that encourages people with discretionary funds to leave their money in an investment, which means they can’t spend it on consumer goods.
The good news is that an EU financial transactions tax could drive more capital to the U.S.—unless, of course, the EU’s bad idea is picked up by revenue-hungry U.S. politicians.