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'Robin Hood' Tax Will Not Make Markets More Stable and Might Hurt Economic Growth

May 30, 2013 in Economics

By Dalibor Rohac

Dalibor Rohac

The Financial Transaction Tax (FTT), which is to be adopted in 2014 by 11 eurozone countries, has come under a lot of flak lately.

Most recently, Sir Mervyn King said he could not “find anyone in the central banking community who thinks it’s a good idea.”

Even the Italian government, initially committed to adopting an FTT, is now having second thoughts — particularly because the tax will affect secondary trading in government bonds.

An FTT might have unpleasant unintended consequences, damaging economic growth on the European continent and beyond.”

In stark contrast, Algirdas Šemeta, the European Commissioner for taxes, claims that the levy of 0.1% on equity and fixed income transactions and 0.01% on derivatives is a response “to the persistent demands of their citizens, who have long called for a harmonized FTT in Europe. The levy will ensure that the under-taxed financial sector finally makes a fair contribution to the public purse.”

Besides generating significant new revenues to cash-strapped European governments, “it should help to deter the irresponsible financial trading that contributed to the crisis we are in today,” says Mr. Semeta.

However, there is very little rationale for such claims.

If adopted, an FTT will not be a boon for public budgets — nor is it likely to prevent financial crises. Instead, it might have unpleasant unintended consequences, damaging economic growth on the European continent and beyond.

The proponents of the tax argue that an FTT will reduce speculative and irresponsible trading, which was allegedly behind both the financial crisis of 2008 and the sovereign crisis in Europe.

But even if one believes that the ability to trade instantly, at practically zero cost, has helped to spread the panic, an FTT is not going to help.

Growing Volatility

There is no evidence that an FTT would moderate market volatility — and attenuate sudden shifts of mood on financial markets.

A recent report by Anna Pomeranets from the Bank of Canada concluded that there have been instances when an FTT led to an increase in volatility — most significantly on the New York Stock Exchange and the American Stock Exchange, between 1932 and 1981, where increases in the FTT were associated with rising volatility, increased bid-ask spreads, and lower trading volumes.

Similarly, the idea that capital is under-taxed in current tax regimes is mistaken.

If anything, tax systems that rely on the taxation of income tend to tax savings more heavily than consumption.

An additional levy on …read more

Source: OP-EDS

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