President of the EU Commission, José Manuel Barroso, recently proposed a “Tobin tax” for the EU. Named after the brilliant economist James Tobin, this tax is on transactions in financial markets. Its deceptive attraction is that it is levied at very low rates on very large volumes of transactions. It appears harmless because these transactions – foreign exchange, bond, equity and derivative trades – are carried out by professional investors and large institutions, opaque and apparently harmless to the ordinary taxpayer.
Borroso made the suggestion, in the view of many people, because he had nothing else to say in his supposed set piece state of the union address, an event that most Europeans wouldn’t even have noticed. He proposed raising €55bn a year (about $75bn). A tax that raised this much painlessly would be very attractive but this is obviously untrue. You can’t just take €55bn out of financial institutions’ profits without consequences. Most of the costs would be passed on to end users, including the general public and the rest would vanish as transactions fell or moved to other jurisdictions.
I had the normal British view that this was a typical piece of ridiculous but still dangerous Brussels posturing, bearing in mind that most financial transactions take place in the UK. But I had not realised that a sort of Tobin tax was tried in Sweden in 1983, with pretty disastrous results. A recent short blog post from PIIE tells more, including how the Swedes hate the tax but have lost their stock market to the Oslo for good as a result of the tax, which raised far less than planned.
The original Tobin idea was to reduce currency volatility after the collapse of the Bretton Woods fixed exchange rate system in 1973. A tax that was evenly applied globally might be useful and help to reduce financial market volatility. But it’s extremely unlikely that such a harmony could be achieved. To introduce it in one area only is to invite traders to simply move to Switzerland, the US and Hong Kong. The tax is irrelevant to the Euro mess that Barroso and other European politicians have created. They are now at risk of going down in the history books as the people who destroyed not just Greece and the Euro but the whole European Union.