The European Commission has not distinguished itself during the eurozone crisis. Such leadership as we have seen has come from national governments, or indeed from Washington, where both Christine Lagarde, International Monetary Fund president, and Tim Geithner, US Treasury secretary, have shown initiative and urgency, rather than from Brussels. Now, in what looks to be a make-or-break week for the whole euro project, commissioner Michel Barnier’s contribution has been to propose extending the French system of joint audits across the continent. Fiddling while the Treaty of Rome burns doesn’t quite capture it.
José Manuel Barroso, European Commission president, now seems to have an answer to the “what did you do in the war, daddy” question. He has proposed, for the umpteenth time, a financial transactions tax. The tax would raise, he assumes, about €50bn, half of which would go back to member states, and half would end up in his own pocket at the commission.
How good an idea is this? And if it is a good idea, is this the right time to advance it? To take the timing point first, it is clear that Mr Barroso needed to have something to say to the European parliament in his “state of the union” address. Leaving aside the folie de grandeur aspect of this packaging, the timing has otherwise little to commend it.
The tax cannot be a realistic part of the new settlement needed to save the single currency; indeed it plays into the hands of those who argue that European policymakers simply do not understand the pace of events. And since Mr Geithner has made it clear that the US wants no part of such a tax, there is a risk of further damage to transatlantic relations, already poor, at a time when a coherent global response to the economic slowdown is of paramount importance.
So the time is not ripe, but what of the principle? There is a Colbertian appeal to Tobin taxes. Why not take a tiny sliver off every financial trade? The golden goose will hardly notice and its hisses will be drowned out by the boos of the crowd baying for bankers’ blood. It seems likely to throw sand in the wheels of some potentially dangerous financial activity, notably high frequency trading, surely one of the dullest ways of making a living that mankind has so far devised.
Yet you cannot take €50bn out of the economy without a significant economic impact. James Tobin distanced himself from those who wanted to adopt his tax as a disguised revenue raiser. Mr Barroso clearly sees it as an added tax, not a redistribution of the burden. And he has not offered a solution to the avoidance obstacle. If there is no parallel imposition in New York, the cost to Europe of displaced activity could be large.
If these problems could be overcome, a financial transactions tax might be a useful addition to the Treasury’s armoury. After all, stamp duty has not destroyed the London equity market. But Barroso’s presentation of the idea in this way, at this time, will do nothing to advance the cause.
The writer is a former chairman of the Financial Services Authority, former deputy governor of the Bank of England and former director of the London School of Economics. He is now a professor of practice at Sciences Po in Paris.
A very low level Tobin tax is a proposal worth considering
A Tobin Tax (opposed, of course, by Tobin) is back on the agenda. For many, support for or against is an article of faith. Yet as others have noted, stamp duty is the equivalent of a Tobin Tax on share trading in Britain. It offends economic theory, the market doesn’t like it, but London survives perfectly well.
The reality is that London’s other advantages outweigh the disadvantage of stamp duty. The question is whether this holds for European forex trading as well as it holds for share trading in London. The answer is basically yes. Time zones matter and Europe’s forex trading is unlikely to move en bloc either east or west and there is no strong financial centre to the south.
A small Tobin tax is therefore feasible. Note the word “small”. Every tax has a Laffer curve. If you tax the poor too heavily, they choose to live on benefits. If you tax forex transactions too heavily, some trade and traders will move away. That matters: traders earn a lot of money, and pay a lot of income tax.
Over a quarter of UK income tax receipts come from the highest earning 1 per cent. Scaring the golden goose away does not make sense. Once they have gone, it is hard to get them back. For that reason any Tobin tax should begin at a very low level, say one tenth of the level suggested by Barroso. That is a proposal that would be worth considering
Whether the money should go to the UK government, the European government or to development is a separate matter. One imagines that Osborne’s objections might be more limited were the money to arrive in his coffers, allowing him to cut other taxes that we know harm the economy.
The writer is chief economist at CentreForum, the liberal think tank
