If you can count on the Europeans to invent one thing, it is the invention of taxation.  The latest effort by the European Commission is one that is just baffling if you have been watching the action in the European banking sector of late.  The sector is already gushing blood.  Here comes a proposal, which we assume is close to dead on arrival, for a financial transaction tax for stock, bond, and derivative transactions that take place between financial institutions.

The EC is probably naive enough to believe its math.  It claims that this could approximately raise €57 billion every year and it wants to start this tax in January 2014.

The effort from the European Commission in the financial transaction tax is dubbed “Making the financial sector pay its fair share.”  This may remind you of the Congressman DeFazio effort that crapped out here in the United States called “Let Wall Street Pay for the Restoration of Main Street.”  It took effort to kill that silly idea as well, but ultimately common sense prevailed over the killing of incentive.

The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the European Union.   What is laughable beyond the proposal itself is that shares and bonds would be taxed at a rate of 0.1% and derivative contracts would be taxed at a rate of 0.01%.

Wait, a lower tax on DERIVATIVES???  How silly is this?  Investors buying or selling stocks would be taxed more than financial derivatives?  Ok, this moved from poor judgment to senseless!  If you include CDOs the argument might not be true, but financial derivative contracts between institutions brought on far more of the mess than stocks and bonds.

The Commission noted, “The financial transaction tax aims at taxing the 85% of financial transactions that take place between financial institutions. Citizens and businesses would not be taxed.” 

In short, this is taking the VAT to financial transactions.  The EC even says so itself.  The report noted, “The financial sector enjoys a tax advantage of approximately €18 billion per year because of VAT exemption on financial services. A new tax on the financial sector would ensure that financial institutions contribute to the cost of economic recovery and discourage risky and unproductive trading.”

We have said it before and will say it again.  This is nothing more than taxing incentive.  How will financial institutions trade when they know that they will be taxed even on trades that they lose money on?

Why citizens need to care about this is that if it does raise anywhere close to the desired amounts, what is to stop the lawmakers from deciding that every day citizens should get to participate in this tax as well?  That is not out of line.  If it moves, Europeans can figure a way to tax it.  Now they have figured out a way to tax incentive.

When the transactions between financial institutions dry up and when the banks and brokerages fire even more workers, the endgame will have seemed silly.  The banks of Europe are already under more pressure than they (and their shareholders) would want.  This is just one more gash into a bleeding patient.

Normally we would call this a strategy thought up by Mr. Dumas, but we worry that the lawmakers won’t truly get the pun.  This is an idea from “Mr. Dumba$$”…

Jon C. Ogg

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