EU FTT

George Osborne has responded robustly to a proposal at the meeting of EU Finance Ministers to introduce a Financial Transactions Tax, as advocated by the European Commission, to raise money directly for the EU.  For once, I agree with him.  It's extraordinary chutzpah to use a Eurozone crisis meeting to propose raising funding with a tax on business conducted largely in one country, the UK, which isn't even in the Euro zone.  I suggest instead an ecotax on luxury cars of the sort made by BMW, Porsche, and Daimler.

The European Commission's argument, as stated by José Manuel Barroso, is the EU countries have spent a lot of money bailing out the banks, and it's only fair that the banks should pay it back by means of a tax on their activities.  But much of the banking activity in London is conducted by banks based outside the EU - in the USA, Switzerland, and Japan.  And the sort of trading that would be prevented by the proposed tax - high-frequency arbitrage - is conducted mainly by hedge funds, which were not bailed out at all.

Is the FTT a good idea?  Usually anything that reduces market liquidity disadvantages market participants generally, including the pension funds that many EU citizens depend on.  A study by the European Commission estimated that the tax would raise revenue of between 0.13% and 0.35% of EU GDP, while reducing that GDP typically by 1.76%, or perhaps by 0.5% with some restrictions on the application of the tax and using favourable assumptions about the effect of the restrictions.  So the expectation is that the tax would depress GDP and hence reduce total tax take.  The one advantage from the point of view of the EU is that the reduced tax income would affect national governments, especially in the UK, while the smaller increase would go directly to the EU.

I agree with George.

Update: Here's Kenneth Rogoff against an EU FTT.  "...Another possibility is the Europeans concluded that an FTT’s political advantages outweigh its economic flaws...."