On the European financial transactions tax

EU tax commissioner Algirdas Šemeta[1] is telling us that the 11-nation Financial Transactions Tax scheme is a brilliant money-raiser:

[...] the tax offers substantial new revenues. Around €30-35bn (£26-30bn) per year will be generated from this small tax of just 0.1% on bonds and shares and 0.01% on derivatives.

Even better, he seems to claim that it's free money for regular citizens:

Will the tax be borne by ordinary citizens? We have taken every measure to ensure that it isn't. [my italics] This is a tax on the financial sector, and 85% of liable transactions are purely between financial institutions. Day-to-day financial activities of citizens and businesses are outside its scope.

I do like that weasel "we have taken every measure" quote, which to me seems to be a long way from the "no" which you might assume he means.

Of course, we can trust Algirdas's judgement about the impact on business given his no doubt no doubt substantial experience in the financial sector. Let's look at his professional career list on his CV:

• 2001-2008: Director; General of the Department of Statistics under the Government of Lithuania
• 1998-1999: Vice-president of the Public Limited Company "Nalšia"
• 1996-1997: Chairman of the Securities Commission of Lithuania
• 1992-1996: Chairman of the Securities Commission under the Ministry of Finance of Lithuania
• 1991-1992: Deputy Head of Privatisation Unit, Government Office of Lithuania
• 1990-1991: Head of the Subdivision of the Economy Development Strategy Division of the Ministry of Economics of Lithuania
• 1985-1990: Economist, Younger Fellowship at the Lithuanian Economy Institute

Given that he graduated in 1985, the only even vaguely commercial experience is his 1 year VP stint at the construction firm Nalšia which seems bizarrely unrelated to anything else he did - and why was he only there a year? The company's website is just a shell, claiming that it is under construction. I'd love to know why they wanted Algirdas on board - and why he left.

Back to the FTT: one wonders, if the €35bn is effectively for free, why he doesn't double or even triple the rates. Surely if €35bn is good, €70bn is better, and the citizens still aren't paying according to Algirdas. Free money! Or perhaps, just maybe, TANSTAAFAL and Algirdas and his cohorts know this.

I'm with the esteemed Mr. Worstall on this article:

The route to the pockets of the citizenry is via the higher cost of capital for corporates leading to less capital investment. As your own fucking EU briefing paper pointed out.

The financial drag on the economies of these 11 countries (and those trading with them) is going to be a lot higher than €35bn annually - all taxes have deadweight costs - but I'd bet that it's going to be diffuse enough that it will be hard to point to any one statistic in 1-2 years time and blame the FTT. Make no mistake, though, the drag will be very real. There are also the opportunity costs of passing this legislation - the companies that decide not to invest in the participating nations because of the increased costs of capital.

The really insidious and destructive impact is going to come from the extra-territoriality clause:

If there is an economic link to the FTT zone, it will apply, regardless of whether the other parties to the transaction are based in London, Singapore, Copenhagen or New York

I would love to know what Deutsche Bank, SocGen, Santander and other large financial entities are thinking and planning right now. This looks to me as if e.g. the UK entity of Santander will be able to trade normally within the UK and US, but any transfers between the UK and Spanish entities are going to be hit by the tax. If I were Deutsche Bank, I'd be planning to do a whole lot less with my Germany-based operations and staff.

What I would like to see is how Algirdas is going to spend the revenue:

Our economic studies show that it will have no impact on jobs, and could even have a positive impact on growth if revenues are reinvested wisely.

Yes, and if my mother's sister had testicles she'd be my mother's brother. The FTT spending is what the FTT opponents should demand to see in 2-3 years - it's unrelated to the actual impact of the FTT but would be a great stick with which to beat the FTT proponents. You can bet your bottom dollar that it's mainly going to be pissed away on subsidising sinking industries, funding dubious political movements, make-work employment schemes and grants for white elephant construction projects. When Algirdas suggests "growth-friendly investment, stabilising public finances or wider commitments such as development aid" I hear "green energy subsidies, bailing out Spanish cajas, and building railways to nowhere."

[1] Since Algirdas is from Lithuania, he has an inconvenient diacritical mark on the 'S' of his surname for which I do not recall offhand the corresponding HTML entity; I am including the UTF-8 character in this blog and hoping that older browsers can cope.