The economist credited with the idea of the Financial Transactions Tax, James Tobin, once wrote: ‘We should be especially suspicious of interventions that seem both inefficient and inequitable, for example, rent controls in New York or Moscow or Mexico City, or price supports and irrigation subsidies benefiting affluent farmers, or low-interest loans to well-heeled students.'
On this account one must wonder what he might have thought about the impact of his tax on financial transactions if he could have forseen the consternation, especially in those eurozone countries now going ahead with it (see page 4), on its introduction 40 years later.
The FTT now proposed in Tobin's name has all the characteristics of a bad tax, in addition to being both inefficient and inequitable, two tests Tobin himself would have used to measure its effects, for several reasons:
1) It is imposed as a penalty on a financial sector that is believed to have ‘caused’ the crisis (i.e. to appease popular, (misguided) opinion), and inequitable as it is targeted at a section of society purely on account of where they work to make a living;
2) Even if one were to support such an ideological objective, it would not work. The tax can and will be shifted to consumers, and, as an ad valorem tax, will not fall on those who profit from financial services (the shareholders of financial services companies, who are, in the main, trade unions, pensioners, and governments);
3) It is a bad tax because those who impose it are signalling an anti investment, anti business, and, at worst, a peevish, envious, or jealous attitude by government towards investors. For France's prospects as an FDI centre it bodes ill in particular;
4) It won't raise any worthwhile revenue, because activities proposed to be taxed will tend to move outside of the jurisdiction, as is being predicted by the Deutsche and Austrian bourses – and these are public markets. OTC markets, which are less transparent will tend to be the location of derivatives trades driven out of the FTT zone;
5) The most concerning aspect of this episode is that the two main countries proposing it are the heavyweights of the eurozone and their bad judgement of what would be best in their own interest is a setback for hopes that the eurozone's crisis will be resolved sooner rather than later.
Europe and the world needs this crisis to be resolved, but, it will only be resolved by sensible actions. Steps that set back the cause of the European single market, and this the FTT certainly does, are not good for Ireland or the EU, and this should dispel any notions of satisfaction that Ireland, let alone escaping the FTT will benefit from the inevitable drift of business to its markets as a result.
There have been attempts to portray the Irish Government's decision on the matter as purely pragmatic, motivated by hopes of windfall gains, or fears of the negative consequences of the tax. Furthermore, fears have been raised that Ireland being outside the FTT club will weaken its position in negotiating on ESM issues.
It is Germany who comes across as weak here, as Chancellor Merkel opted for the FTT in trying to appease her SDP Opposition into supporting fiscal discipline, a problem Ireland's Government does not have, thanks to the solid backing provided by the Constitutional guarantee given by Irish voters at the referendum.
The FTT might make for good politics for Mrs Merkel, but this is bad economics, and the Irish Government was right to oppose it, from a national and global perspective.