Britain is right to oppose a Tobin tax

Allister Heath
SUPPORTERS of an EU Tobin tax like to see themselves as the enemies of finance and supporters of the poor. They want to punish the City while raising money for increased public spending – or if the EU’s plan goes ahead, to finance Brussels.

They are certainly right that such a tax would hurt financial institutions, especially those trading on their own behalf, though most would be able to relocate overseas – but what they don’t seem to understand is that it would also have a devastating effect on savers and pensioners by slashing their returns on investment. It is always the end users who end up picking up the bill: investors and companies, and they are less mobile than hedge funds and high frequency trading houses. Intermediaries tend to pass the costs on. The tax would reduce the prices of shares and other assets and increase the cost of capital for companies, reducing investments and jobs.

The European Commission’s proposal is for a 0.1 per cent tax on the value of equity and bonds transactions and a 0.01 per cent tax on all derivatives transactions. The tax will be applied whenever investors hand over money to an institutional investor (and whenever they withdraw funds), as well as to each transaction conducted on their behalf by fund managers. Active investments – where managers buy and sell to try and beat the market – will be hammered especially badly.

The Alternative Investment Management Association uses IMF modelling to calculate that the tax would reduce the market value of a typical stock (which changes hands every three and a half months on average) by 7.60 per cent and increase the cost of capital (for the company issuing the stock) by a highly significant 0.25 per cent. Investment managers will have an incentive to hold fewer equities and more derivatives (due to the bias in proposed tax rates). Active fund managers will be less interested in holding boards to account. Spreads will widen, price discovery will be stymied and volatility will increase. One recent paper showed that high frequency traders have helped cut the price impact of a 1,000-share trade by $0.083, helping traditional investors.
A study out today by Oliver Wyman focuses on the impact on the foreign exchange markets which employ thousands in London and which provides vital hedging and other services to companies and wealth managers. Around 45 per cent of currency trading is in the swaps market, which is being targeted; costs for all transactions would be hiked by three-seven times and by 18 times for the most traded part of the market. A typical euro-dollar one week swap with a notional value of €25,000,000 between a bank and a pension fund currently comes with a transaction cost of €279. Under the EU plans, the dealer would be hit with a €2,500 tax, as would the pension fund, an 18-fold increase. Three quarters of trading would move outside the EU; global volumes would fall; and liquidity would decline, increasing indirect transaction costs by up to an extra 110 per cent.

Remarkably, the European Commission’s own analysis concluded the tax would leave the EU worse off, yet such is its hatred of the City that it still supports its imposition. It estimated it would raise €25bn-€43bn a year (depending on the extent of the collapse in trading) and cut EU GDP by 0.53 per cent (€86bn) to 1.15 per cent (€186bn). The government is right to oppose this destructive tax.
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