Resurrected finance tax proposal fuels classic criticism

17th August 2011, Comments 0 comments

A French-German revival of plans to tax financial transactions has provoked a storm of criticism from all sides that it would drive business elsewhere and be simply too hard to enforce.

From European Central Bank president Jean-Claude Trichet to many economists and nearly all banking federations, many say it is an idea that looks good on paper but can only work if applied worldwide without exception.

Deutsche Boerse, which runs Frankfurt's stock exchange, said the tax, which German Chancellor Angela Merkel and French President Nicolas Sarkozy endorsed Tuesday, would "be a gift to non-regulated financial markets and products."

The British Banking Association agreed.

"We need to ensure that if a transaction tax is being actively considered by policymakers, it is being considered by policymakers around the world, otherwise the consequence could be distortion of the markets which ultimately loses business and impacts on economic growth," a BBA spokesman said.

Trichet warned EU lawmakers in June that "a tax imposed in Europe and nowhere else would lead to a major loss of activity" while UBS analyst Arnaud Giblat noted that a comparable Swedish levy in the 1990s led to an 85 percent fall in transaction volumes.

The European Commission nonetheless mooted such a tax in June to help finance the bloc's budget and cut contributions from member states.

A rate fixed at between 0.01 and 0.001 percent would bring in between 30 and 50 billion euros ($43-72 billion) a year, the commission estimated.

Germany's main banking federation BdB called the latest tax proposal a distraction from the causes of the current financial crisis and observers suggested it was aimed at voters in Germany and France.

Claire Demesmay, at the German Council on Foreign Relations (DGAP) said: "A financial tax is something that pleases domestic populations most of all."

Berenberg Bank senior economist Christian Schulz noted meanwhile that both Merkel and Sarkozy "are under pressure domestically, which may explain" why the tax plan was revived.

In addition to the main objections, the federation of German mutual banks (BVR) warned that a transaction tax "must not be allowed to have a negative impact on normal hedging activities on foreign exchange markets which are needed by companies in the real economy."

Deutsche Boerse also warned that it would be difficult to track all transactions.

Like shares in other market operators, those in Deutsche Boerse slumped heavily in afternoon Frankfurt trading, showing a loss of more than five percent.

A trader cited by Dow Jones Newswires said that the kind of transactions in question account for more than 40 percent of Deutsche Boerse's trading volumes.

Another key problem is that it could be hard to effectively enforce a tax given the fluid nature of financial markets.

Christian Muschick, an analyst at Silvia Quandt, rejected the plan, which he said "would be very easy to be loop-holed given the global structure of the financial industry."

To avoid speculators taking advantage of global differences in financial market regulation, "a global forum such as the G20 would be better placed to agree such a tax, however that it is even more unlikely," Schulz added.

Finally, Frederic Donnedieu de Vabres, head of the tax advisor firm Taxand, said: "This type of knee-jerk blanket tax is simply too complicated to implement and would require a fundamental overhaul in country-specific tax policy.

"In the current global economy where there is a very real need to focus on recovery -- an overhaul of global tax harmonisation appears still to be light years away."

© 2011 AFP

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