More Financial Repression in Europe: Tobin’s Tax

Well Europe seems to see only taxation as a way out of their problems which are meant at preserving the status quo.

Eleven countries in the EU have proposed to impose a Tobin’s Tax or Financial Transaction Tax

From Reuters.com, 

A plan by a group of euro zone countries to introduce a tax on financial transactions threatens to drive more trading to London from centres such as Frankfurt, exacerbating divisions in Europe as it struggles to overcome an economic crisis. 

On Tuesday, 11 countries agreed to press ahead with a tax set to fall on the trading of shares, bonds and derivatives, although it may take up to two years before the necessary legislation is in place and the scheme starts.

Commonly known as a "Tobin tax" after Nobel-prize winning U.S. economist James Tobin, who proposed one in 1972 as a way of reducing financial market volatility, it has become a political symbol to make banks, hedge funds and high-frequency traders pay towards cleaning up a debt crisis shaking the continent.

But the EU has not been unanimous. To the contrary, such tax may even threaten escalation of political rifts among the member states that could undermine the already fragile relationships. 

More from the same article:

But the move threatens to open yet another rift in Europe, where countries already diverge in their regulation of finance and politicians have long argued over how best to control the banks blamed for triggering financial turmoil in 2007.

Proponents first tried to introduce the tax worldwide in 2008 via the Group of 20 major economies. Faced with U.S., Swiss and Chinese opposition, they tried to persuade the 27-member European Union to lead the way, or even the 17-nation euro zone. But each organisation had its sceptics.

Following an aborted attempt to introduce its own such levy in the mid-1980s, Sweden has repeatedly warned that introducing the tax will simply drive trading elsewhere. Britain, home to the region's biggest financial centre, London, will not join.

The group of Tobin taxers:

Germany, France, Italy and Spain have made it clear, however, they will be among a group that will impose the charge that is set to be 0.1 percent on the trading of bonds and shares and 0.01 percent for derivatives deals.

But the move by the group, which includes Austria, Belgium, Slovenia, Portugal, Greece, Estonia and Slovakia, has been greeted with scepticism by analysts and industry, who believe it fragments Europe's approach to regulating finance at a time when a separate plan tries to unify euro zone banking supervision.

If transaction costs rise enough due to these taxes, compounded by intensifying regulations, particularly capital controls, we should expect to see capital move away from these Europe nations and seek out places where money is treated best or is welcomed.

Asia should take this opportunity to liberalize more her financial markets in order to attract investors looking for capital friendly environments.

Blaming Technology to Justify Tobin Tax

The Economist writes, (bold emphasis mine)

MOORE'S Law, an observation that the "number of transistors incorporated in a chip will approximately double every 24 months", has held broadly true since the creation of the first transistor in 1947. Computing power has increased some 600-fold over the past 15 years; 2.6 billion transistors can now be crammed onto a single computer chip. This advancement has facilitated the ability to trade ever-larger volumes of shares. During the 1960s, just under 17 billion shares were traded on the New York Stock Exchange. That amount was surpassed over just four average trading days in September 2011. And while the number of shares listed has increased by some 50-fold, annual share turnover has increased from an average of 17% in the 1960s to nearly 300% between 2008 and 2011. In theory all this activity ought to lead to more accurate pricing of stocks and more efficient allocation of capital. In practice there is a lot of tail-chasing going on. That has led to calls for a tax on financial transactions, the Tobin tax, which advocates argue would be a painless way of boosting government finances.

While it may be true that technological innovations may have boosted stock market trading volumes via widespread dispersion of information, deepening connectivity, algorithm based and real time trades, growing array of trading instruments and others, it doesn’t follow that “a lot of tail chasing” or market volatilities can be blamed on technology enhancements.

This seems to be a non-sequitur used to justify taxes on financial transaction which will only lead to more government spending based debt accumulation which ironically has been the root of today’s crisis and the consequent market volatilities.

The article also excludes the effects of the intensive politicization of the marketplace which leads to massive price distortions, malinvestments and business cycles.

Beware of politically biased commentaries veiled as expert opinions.

France-Germany Plot a Politically Centralized Eurozone with More Financial Repression

The struggle to save the Euro has been giving windows of opportunities for Euro politicians to adapt the Emmanuel Rahm doctrine/creed—use the crisis to implement things that could not be done before.

From the thejournal.ie, (bold emphasis mine)

FRANCE AND GERMANY have agreed to introduce a joint corporate tax rate in their countries by 2016 – and have called on other Eurozone countries to establish a collective financial ‘government’ for the entire Eurozone.

Holding a press conference after a bilateral summit, German chancellor Angela Merkel and French president Nicolas Sarkozy said their countries would also try to introduce a so-called ‘Tobin Tax’ on financial transactions as a matter of priority.

Those who believe that the success of the Euro will depend on ‘fiscal and political union’ will acclaim this move as a necessity. They would see this as an elixir. Again, they would be wrong.

As I pointed out earlier, the Soviet Union (or Yugoslavia) had them both, but this didn’t stop these unions from dissolution. Proponents of the political-fiscal union nostrum, only look at the US as THE model, without looking at others. This is called the focusing effect.

Yet everything boils down to fundamental economics, where spending more than one can finance would extrapolate to insolvency, bankruptcy and or eventual political dismemberment. No amount of fiscal or political union will stop this. Politics will never supersede economics.

Moreover, the plan to establish a ‘Tobin Tax’ on financial transactions has proven to be ineffective that would only likely result to a backlash.

Notes the Bloomberg/SF Gate, (bold highlights mine)

A 1996 report on financial transactions taxes for the Canadian government found that Sweden's 1984 levy of 1 percent on equity trades, doubled two years later, caused half of the country's trading to move to London by 1990, a year before the tax was abolished. Capital gains revenues decreased as volume sank, "almost entirely offsetting revenues from the equity transactions tax," the report said.

We are seeing a world enduring dramatic strains from a transition. Accrued stress from democratization of information, widening of social connections and commerce via (globalization) which has been operating in stark conflict with 20^th century welfare based governance system.

Politicians desire to preserve the status quo by proposing the same centralized vertical structured organizations that had been scuttled by the end of the 20^th century.

Yet even under the same structure, boom bust policies and welfare spending, which has been the cause of this continuing crisis, has still been viewed as a sine qua non path to political survival or success. This is path dependency.

That’s why there seems no way out as welfare political economies are bound for collapse, regardless of ‘unions’. It’s just a matter of time.

Notice how French and German politicos have been propounding to adapt measures that would forcibly rechannel resources from the private sector of the region to the foundering politically privileged banking sector.

Eventually people will see through this tomfoolery and revolt. The growing incidence of the riots in developed economies (as in UK) could be imputed to such dynamics.

Notice too how desperate these politicos are, such that they would take upon any measures regardless of the consequences. Taxes on financial transactions will force investors to look elsewhere.

All these for the sake of saving the banking system who feeds or funds the welfare government and who has been backstopped by central banks.

Now Europe’s self-inflicted losses can be Asia, ASEAN and the Philippines’ gains. All we need is to assume the opposite policies of what Europe or the US has been doing. This means we should decentralize, liberalize trade, decrease taxes and repeal cumbersome laws and regulations, and most importantly is to diminish dependence on politics by embracing economic freedom.

In short, let entrepreneurs determine the prosperity of the nation.