Fears Europe

29th September 2011

The UK government says it will resist plans for the levy known as the Tobin tax, reported here in the Independent, on the grounds that it will only apply in the European Union placing EU and UK financial institutions at a competitive disadvantage to their international rivals.

The EU Commission President Manuel Barroso says he believes the tax – official name the Financial Transactions Tax – could raise as much as Euro 55bn a year.

Speaking on Thursday about plans for the tax, Commission president José Manuel Barroso said: "Member states, I should say taxpayers, have granted aid and provided guarantees of €4.6trillion to the financial sector. It is time for the financial sector to make a contribution back to society."

The proposal would apply a tax of 0.1 per cent on trading of stocks and bonds, with a 0.01 per cent rate for derivatives contracts. Those minimum rates would apply throughout all 27 EU nations.

It has been suggested that Britain could opt out of the tax and the tax might be introduced across the Eurozone alone.

However trade website Money Marketing reports on a warning from the Investment Management Association that some investment funds could be taxed three times and pensions twice massively penalising Britain's savers and investors.

Julie Patterson, the IMA's tax expert, said: "Pension funds could be hit twice by this tax: when the fund manager arranges a transaction on behalf of the fund and when the fund acquires or sells that asset. Investor in Ucits [funds which can be sold across Europe] investors could be hit three times, as they may also be taxed when they buy units in the fund."

The British Bankers' Association has also warned that the UK economy could be "particularly affected" by a transaction tax. "Four of every five financial transactions in the EU take place in the UK," it said.

The proposals have certainly provided grist to the mill for British Eurosceptics.

City AM quotes Tory Eurosceptic Bill Cash accusing the Treasury of dishonesty for its position of supporting a tax globally but not regionally.

Speaking to the paper, Cash said: "The government is being thoroughly dishonest for political reasons. There is no justification for a Tobin tax in any form, which would badly affect growth whether it was global or not."

Ceedweb here relates what is understood by a ‘Tobin' tax, named after the late Nobel economics laureate who first proposed it several decades ago. However the real Tobin suggested a levy on currencies not on bond and equity transactions.

This probably reflects the fact that this tax proposal would be internal to the EU though of course it will affect transactions between EU actors and other international players. That fact has the Toronto Globe and Mail quoting Lex from the FT, wondering if the tax – as currently set out – can succeed because traders will reroute transactions to avoid it. However it suggests one solution. "A more promising avenue might be to levy it depending on where the assets originate. It is hard to argue that a French government bond originates in Bermuda. Such an approach, following moves on both sides of the Atlantic to level the playing field among trading venues, might even help regulators build an audit trail of where assets whizzing around the system truly originate."

Lex suggests that this and not the revenue raising potential is the real rationale for the tax.

Here the Euractiv website gives a rundown of the political positions in the EU. Generally the left agree and the right including the UK Conservatives' group in the European Parliament are opposed.

The tax has also divided the Guardian message boards along the expected lines.

Newmacfan writes: "This is the only tax that can get to the people who caused this for a contribution! Now let's add to this a personal tax more in line with the way the FS do business, CG back to 40 percent and then a Europe wide tax on financial transactions p
ayable at the sovereign point of gain, that to be backdated to 2008!

"One thing we have to remember, all of us, with all the spin around, look to the root cause of the problem! Not what hurts us now! The original root cause, what it was, who conjured it up and why."

MahiMahi is deeply sceptical. He writes: "Barroso is basically adopting a measure that he knows will severely dent the Eurozone economy. In the FT today : "Barroso did not release details of his plan, except to say that it could raise some EUR 55bn a year. However, a study carried out by the Commission has found that the tax could also dent long-term economic growth in the region by between 0.53 per cent and 1.76 per cent of gross domestic product."

"This basically means the current rate of GDP growth is likely to be eliminated by this gesture – as it will cost far more in lost taxes than the new taxes it raises.

"This is what Europe has come to – shooting itself in the foot with a futile gesture it hopes will appease popular anger. Southern European governments engaged in grossly reckless borrowing and overspending for decades and now desperately need to blame someone for their inevitable decline in living standards and higher taxes."

More from Mindful Money:

Pensions: Investors still not aware of commission they are paying

Pensions confusion could put people off saving altogether

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