Unintended Consequences from the French Financial Tax Experiment

Desperate governments scrounging for money via more taxes and regulations (financial repression) have been getting an unexpected pushback from the marketplace.

From Businessinsider.com (bold original)

One suggestion that has gained popularity in the post-crisis regulatory debate is a tax on financial transactions.

Proponents suggest that the tax would raise revenues for governments (at a time when such revenues are badly needed) and curb the excessive speculation that contributed to the global financial crisis.

In August 2012, France became the first eurozone nation in the wake of the financial crisis to implement such a tax, and so far, it's been a total failure.

In an article for Risk.net, Hannah Collins explains that in France, the tax – which amounts to 0.2 percent on transactions involving buying or selling of shares of stock – is actually just shifting investors out of equities and into even riskier, more opaque products like derivatives and derivatives-based ETFs:

Investors who own French shares are selling them and taking positions on them through derivatives instruments such as contracts for difference, structured products and ETFs, according to a Paris-based lawyer. "Most structured transactions remain outside the tax," he says. "It is due only if you have actually purchased the shares."

In other words, instead of curbing excessive speculation, the tax is simply forcing those speculative activities into darker, less-regulated corners of the market.

People’s incentives to act are also shaped by social policies.

Instead of moving in accordance to the intended goals set by politicians, the financial markets resort to regulatory arbitrage—finding legal loopholes from the new legislation from which to operate on.

And the incentive to reduce transaction costs by eluding the Financial Transaction tax would likely extrapolate to the nurturing of shadow derivatives-banking system where in this case has been signified as driving “investors out of equities and into even riskier, more opaque products like derivatives and derivatives-based ETFs”.

In short, politicians create or spawn their own Frankensteins.