Tobin Tax - To Bin our Financial Services Sector

On September 28th, The European Commission formally proposed a Financial Transactions Tax (coined 'Tobin Tax' after the Economist James Tobin).  Having accomplished so much in his academic life, I find it somewhat disappointing that his legacy will live on in the form of a levy which may very well strangle the growth and stability he sought to promote.

Moving on from the tax's pseudonym, the paradigm of the EC's proposals would be to impose a toll of 0.1% on every security transaction involving EU based financial institutions.  All OTC derivative deals would also incur a tax of 0.01% on the principal amount of the transaction.  The objective; to raise an indicative €55 billion for European Union nations.  The implications on the other hand will be far less black and white.

Turning attention first to those who are in favour of implementing such proposals, we witness three key arguments.  The first is obvious (and appears in my view to be the only one the EC have considered), the tax will raise money for a debt ridden area in times of austerity and economic hardship.  The second, is more personal.  People want banks and financial institutions to foot the bill for a problem they created (which is understandable and in a just world may be a little more persuasive).  Finally, supporters realise this could be the end of high-frequency traders and with it, the bad money that follows.  HFTs aim (in the most part) to capitalise off of arbitrage; trading many times a second, taking advantage of pricing indifferences.  As a result, computers account for c.90% of market transactions and have therefore 'taken over' in a terminator style saga (to put it melodramatically).

The problem is though, supporters will likely receive a fraction of the returns expected from the intrinsic benefit of the toll.  Financial institutions' whose cages have already been rattled by Basel III and (within the micro arena), proposals such as the Vickers report (see earlier post), will likely use this as an opportunity to move to other parts of the world where they can retain their competitive edge.  HSBC have already threatened to move to Hong Kong and ICAP, a FTSE100 inter-dealer broker have threatened they may move off-shore if the Tobin tax were to be instated.

The EC claim (at this stage) to implement the toll only if political agreement throughout the EU is unanimous. Speculators believe however that they may go ahead regardless, which could have a positive impact on the UK market share of the global financial services industry if Britain were to veto the proposal.  Given Britain's status as one of the world's dominant financial centres, I don't see the Coalition Government signing up (thankfully.)

On a final note, I dare say I'm in agreement with a Tobin tax, if acceptance was world-wide.  I very much doubt this is possible however, considering each nation has their own incentives to promote business.