STOCK MARKET WATCH -- Friday, 4 May 2012

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41. A Choice Between Two Evils?

http://www.theeuropean-magazine.com/450-herzog-bodo/641-why-we-should-favor-a-global-transaction-tax

The British government's objection has put European plans for a transaction tax on hold. But there is no convincing alternative: States must regulate volatile trading markets and make the market pay for crisis rescue packages.



Since September 2011, the European Commission has been proposing a transaction tax that aims to make the financial sector pay for state support and state guarantees during the financial and economic crisis from 2007 until 2009. However, the United Kingdom, the Netherlands, and some other European countries have rejected this idea. The argument of the critics is common knowledge; they argue that such a tax can only be effective if it is introduced on an international level. Otherwise the financial transactions would simply move to countries and financial centers without a transaction tax.

In an economic sense this might be correct because capital is quite mobile. Another drawback of a transaction tax is that the customers have to pay the bill, not the traders or bankers. To put it simply; the steering effect of this tax is inappropriate if implemented nationally. But we can also make the economic argument that it is important to reduce the volatility and contagious effects of high frequency trading. A transaction tax on derivatives would have at least the potential to reduce these effects a little bit. But to be effective it still requires a European or at best an international implementation.

As a result of the political disagreement in Europe, the German Finance Minister Wolfgang Schäuble has now expressed cautious support for a tax on stock trades – similar to the UK stamp duty reserve tax – before broadening the tax base at a later date. This would entail a tax payable on all transactions involving shares of corporations listed on a stock exchange, with the tax being levied according to the place where the corporation has its registered office.