There's much excitement in certain quarters that the European Union (or more accurately, just the eurozone part of it) will reach a deal to impose a financial transactions tax (FTT). This is seen by some as a way of bashing the bankers who did so much to cause the Great Recession those five and six years ago. The idea is to take a small fraction (0.1% on stocks and bonds, 0.01% on derivatives) and this would wipe out some of the speculative froth that causes such damage. Or, closer to what is the real motivation, Hah! Take that bankers!
There's a number of theoretical problems with the FTT. For a start, the markets where it would really bite aren't the markets that caused the crash. That was almost exclusively something to do with housing finance, mortgages, CDOs and the like. These are not things that are frequently traded: and the FTT impacts on markets where trade is frequent, like options, FX, derivatives and stocks. None of these markets actually had a problem and none of them contributed to the recession. So even at first glance it does seem unlikely that the FTT will be a solution. Taxing things that didn't cause a problem and a tax that will have no impact on those things that did is unlikely to be a solution really.
The second problem is over the impact of the tax, or in more formal jargon, the incidence of it. Sure, it will be the banks and the traders sending the checks in but who really, in an economic sense, will bear the burden? Which is where we come to today's problem. The Dutch are refusing to sign up if the tax harms their pension funds:
Mr. Dijsselbloem said that even if the tax ended up in the form of "a small stamp duty," it would "still affect savers and, in the Netherlands, the biggest savers are the pension funds."
The Dutch were initially reticent about joining the group of states considering the financial transactions tax, but were won over after receiving assurances that their pensioners wouldn't suffer as a result.
This is something I pointed out in my one and only peer reviewed paper to date (and evidence to the House of Lords). At good part of the burden of the tax will actually fall upon savers, not the banks or traders. One of the reasons we know this is because various studies of Stamp Duty on share purchases show that that's exactly where the burden falls. On savings and more specifically upon pensions. The tax is a charge upon buying shares for your retirement so the charging of that tax lowers your eventual pension.
And that is exactly what the Dutch are pointing to.
We can also look at this in a larger fashion. The Dutch said we can only have an FTT if savers and pensions aren't affected. So, obviously savers and pensions can't be charged the tax. But that is exactly the same thing as stating that the burden, the incidence, of the tax is going to be upon savers and pensions, not upon the bankers or traders.
So, remind us all why we want to reduce peoples' pensions in order to punish the bankers?
Quite, the basic concept just doesn't work, does it?
