The Wrong Tax for Europe

CAMBRIDGE – Europe is already in pickle, so why not add more vinegar? That seems to be the thinking behind the European Commission’s proposed financial transactions tax (FTT) – the Commission’s latest response to Europe’s festering growth and financing problems.

The emotional appeal of a tax on all financial transactions is undeniable. Ordinary Europeans have to pay value-added tax on most of the goods and services that they buy, so why not tax purchases of stocks, bonds, and all kinds of derivatives? Surely, such a tax will hit wealthy individuals and financial firms far more than anyone else, and, besides, it will raise a ton of revenue.

Indeed, the European Commission estimates that its proposed tax of only 0.1% on stock and bond trades, and 0.01% tax on derivatives, will raise more than €50 billion per year. As a bonus, an FTT will curb destabilizing speculation in financial markets.

If only it were so simple. Of course, taxation of financial firms’ profits and bonuses should be made more similar to that of other economic activities. Excessive leverage needs to be reined in. A return to pre-2007 levels of macroeconomic and financial stability would support growth. Unfortunately, much as FTTs are the darling of leading liberal economic commentators and Robin Hood NGOs, they are an extremely misguided approach to achieving such worthy ends.