Mr. Dumas Idea of the Day: E.U. Financial Transaction Tax (NYX, NDAQ, CME, ICE)

If you can count on the Europeans to do one thing, it is to invent new taxation methods regardless of whether or not it makes sense.  After Merkel and Sarkozy met today, in what many investors hoped would be a new round of saving the financial system in Europe, there was a mention in their press conference that they would seek a financial transaction tax.  The details were not clear nor was the exact aim of a transaction tax.  As you can imagine this is slapping the shares of exchanges.

NYSE Euronext, Inc. (NYSE: NYX), in the proposed deal with Deutsche Bourse, is down almost 7% at $26.97.  Nasdaq OMX Group Inc. (NASDAQ: NDAQ), which has Nordic exposure, is down 3.4% at $22.81.

CME Group Inc. (NYSE: CME) is down 3.4% at $251.80 and the IntercontinentalExchange, Inc. (NYSE: ICE) is down 5.3% at $110.15.

What the transaction tax would be is still not known other than something to coordinate greater Euro-zone cooperation.  It really is a silly idea and a proposal of this sort hurts markets rather than helps them.

This has been proposed numerous times by politicians in the United States, but these moves are almost always shot down.  The reason is simple: it is a taxation of incentive.  The government gets to make money off of financial transactions whether investors win or lose.  That is nothing short of an incentive tax.  This is an idea crafted by people with the last name Dumas.

If you want to know why we feel so strongly about the notion of a transaction tax it, is simple. Imagine if the government suddenly started increasing the cost of opening a new business or suddenly started taxing a business ahead of time before it ever made a dime or sells a product.  That is taxing theoretical gains that not only are not even on paper… The theoretical gains are not even underway yet.

This is a move that hurts far more than any help it brings.  Let us hope a moment of Eureka occurs and they say “Do over!” between now and September.  At least maybe they can clarify this into something tangible rather than just having an unexpected outlier comment out there like how they left it.  Really, how stupid can politicians be?

JON C. OGG