A Tax That Changes the World

02/05/2013 9:00 am EST

Focus: TAXES

Well, it could very well change the investing world if the European Union implements a tax that it recently conceived for its markets, observes John Browne of Euro Pacific Capital.

Although it was barely noticed by the American press, EU finance ministers on January 22 approved a new "Financial Transactions Tax" (FTT) that has implications for market competitiveness around the world.

The move was conceived as a Franco-German initiative and was supported by seven other EU nations—including the entire bloc of highly indebted southern tier nations—to reach the minimum nine nations required to press ahead under the EU's so-called "enhanced co-operation procedures."

If at least one of the transacting parties involved is an EU resident, the tax will impose a 0.1% tax (on both sides of a financial transaction) on secondary-market trades in equities, bonds, securities, and REPOS. Derivatives will be taxed at a lower 0.01%.

Although limited presently in scope and at an apparently low rate, the tax will nevertheless provide an extra layer of financial bureaucracy that will dissuade some market participants from transacting in the Eurozone.

It should be patently obvious that transactional fluidity is supportive of efficient markets and ultimately of economic growth. It is only in the poisonous, anti-capitalist, post-crisis environment that such a measure could be passed. More importantly, the measure is a "supra-national" tax that helps to pave the way toward a global taxation system. Not only will such a system be economically damaging, but it will be devoid largely of effective democratic accountability.

In its March 2011 tax meeting in Brussels, the EU had originally proposed a "Financial Activities Tax" (FAT), a more comprehensive—and potentially more destructive—EU-wide measure. The opposition to the tax was so fierce, most notably from Great Britain, that the FTT was proposed as a compromise.

Ignoring the role of the central banks in the financial debacle, the German Finance Minister commented lamely that, "The financial sector must appropriately participate in bearing the cost of the financial crisis."

According to the EU's Tax Commissioner, Algridas Semeta, the FTT decision was a "major achievement for EU tax policies." Those who believe, as I do, that the EU's covert intent is to erode the traditional independence of the world's financial markets, particularly the dominance of London and New York, certainly share those sentiments.

In an economic impact analysis running to over 1,000 pages, the EU Commission estimated that the FTT would raise $76 billion annually. The commission admitted that this would cause a 10% drop in securities transactions, a 70% fall in derivatives trading, and result in a loss to the EU's GDP of some 0.53%.

All this in an EU economy struggling now to prevent a recession falling into a depression! Of course, the Commission failed to consider any resulting lost tax revenues implied by a fall in GDP.

On its face, it was clear that the idea for both the FAT and the FTT was a product of left-wing ideology of soaking the so-called rich, but devoid of any real understanding of how free markets operate. If such a tax were imposed in single country market, in the UK for instance, it would encourage a massive flow of business to other national markets. The EU must feel that its size and status will protect it from such an eventuality.

Few suspect that the FTT will offer economic benefits that would outweigh the harm it will impose. But that is not the criteria by which the measure will be judged by EU leadership. What if FTT is designed not as a tax to encourage more responsible investing, but as a covert weapon to win political control of Europe?

FTT is a supra-national tax imposed on top, and independent of, national financial taxes. Once the infrastructure to enforce and collect the tax is established, the tax rates can be raised relatively easily. Most importantly, once such supra-national taxes are established, they suffer from very little if any democratic supervision.

EU Tax Commissioner, Algirdas Semeta, has said that the Commission has arrived at a means of levying a tax that prevents investors from relocating. The tax will be imposed on both the buyer and the seller of a financial instrument so long as either of the two parties is based within any participating EU country. This means that even investors in London or New York accustomed to paying only their domestic taxes may not escape the new tax completely.

At a time when governments should be encouraging the free flow of capital, this measure moves us exactly in the wrong direction. Combined with the heightened regulatory scrutiny in the United States (President Obama's appointment last week of the first former federal prosecutor to head the Securities and Exchange Commission), the move bolsters the belief that the West will likely cede financial market leadership to the freer and more vibrant markets in the Pacific.

Read more from Euro Pacific Capital here...

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