Could a Transaction Tax Be Part of European Debt Solution?

French president Nicolas Sarkozy has gotten agreement from Germany’s chancellor, Angela Merkel, for a tax on financial transactions. The reaction from Britain, Europe’s financial center, is decidedly chilly. The US government has also come down against transaction taxes.

Sarkozy has long supported the tax, which — if it followed European Commission recommendations — would add 0.1% of the value of an equity or bond transaction and 0.01% of every derivative transaction to the EU’s coffers.

The argument against such a tax is that unless it is adopted universally, the uneven playing field would send investors to countries where such taxes are not imposed. The UK’s prime minister stated the case against the tax succinctly:

The idea of a new European tax, when you are not going to have that tax put in place in other places, I don’t think is sensible. So I will block it unless the rest of the world all agreed at the same time that we were all going to have some sort of tax.

While such a tax could raise up to €55 billion in the EU, Bloomberg News notes that consulting firm Ernst & Young believe that such a tax would ultimately cost Europe as much as €116 in lost economic activity and reduced taxes from other sources.

Do they think that firms will not have an interruption transacted business from such a tax?  Capital seeks nations that treat it the best, and in many cases this is the equivalent of an incentive tax because it taxes investors and trading firms whether they make money or lose money.

Paul Ausick