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Sunday, 17 December 2017

Tobin Tax temptation is not all a bed of roses

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

I noted earlier this month that the Dax index was, in terms of points, trading below the FTSE, something which has not happened in years, and that anyone who believes the euro is not about to implode would do well to buy the spread. By close of business last night, the Dax was back above the FTSE by 360 points or about 7%. Given the predictable outcome of the vote in the Bundestag with respect to the expansion of the European bail-out fund, that differential is likely to widen further.

The outcome we will be observing is not whether or not the measures are carried by the Bundestag but the extent of the dissent within the ranks of Mutti Merkel’s coalition; the opposition is not set to oppose which in its own way will be defeat for the Chancellor as it shows she does not command her own side of the house and needs to rely on the opposition to help her push through important legislation.

Mutti Merkel’s conundrum

With federal elections due next year, Merkel is faced with a conundrum; does she pursue federalist policies in order to provide the eurozone with the stable base it needs so urgently or does she leap into the pool of eurosceptic populism in pursuit of a second term in the Chancellery? Hobson’s choice, so far as I can tell. There is no need to list all the benefits which Germany has drawn from its membership of the single currency and all the arguments why it “owes” it to its partners to stump up have also been adequately aired – just knowing all the questions does not always make it easier to identify the correct answer.

However, I did have to have a giggle over Jose Manuel Barroso’s revival of the Tobin Tax debate. I should like to add at this point that I am not entirely against the idea. In his column in the FT yesterday, John Plender pointed out that a tax, however small, might act as a kind of sleeping policeman to some of the high frequency traders. I’m no great fan of this HFT micro-arbitrage stuff and to see some of it squeezed out and returning the stock exchanges to their purpose of serving listed companies and their investors, rather than computer geeks, gives me, an old real money guy, something of a warm and fuzzy feeling.

I get a warm fuzzy feeling to see some of the HFT stuff squeezed out and returning the stock exchanges to their purpose of serving listed companies and their investors, rather than computer geeks

The City of London will oppose the tax, of course, and I can’t see too high a probability of it making it on to the statute book here. If the eurozone introduces it unilaterally, they’ll be breaking out the champagne in London unless this is followed up with more anti-tax haven legislation and the UK suddenly finds itself listed as one of them. I can’t see that either but the EU does have a habit of coming up with the most amazing legislative toe-loops and Rittbergers in seeming ignorance that the world does not end at Dingle Bay.

The numbers they are talking of in terms of potential revenue are enormous – the headline Barroso used was €53bn. To assume historic volumes and to multiply that by whatever level of levy he envisages is, in my view deceptive, disingenuous and, knowing that the figures are wrong, downright fraudulent. Having just commented that HFT would probably be the first victim of a transaction tax, we can strike a huge chunk right off the top. By value, HFT was estimated in 2010 by make up 56% of equity trades in the US and 38% in Europe. Regular trading activity would also diminish further and the hit to overall European GDP is estimated, depending on who you listen to, to be worth anything from 0.5% to 2.00%. That is a lot in anybody’s book.

The EU does have a habit of coming up with the most amazing legislative toe-loops and Rittbergers in seeming ignorance that the world does not end at Dingle Bay

Furthermore, the President of the European Commission went on another of the much loved banker-bashing excurses by dusting off the old chestnut that banks had taken so much out and that it was time to put it back in again. If banks really had taken so much out they’d be rich today, not teetering on the edge. True, some bankers did very well, some even obscenely so, but in the European context is the problem that the sovereigns borrowed and spent too much or that the banks (and the insurers and the pension funds) lent them too much?

I won’t even go into who sat there licking their chops when the banks were coining it and appearing year after year as the largest tax payers in the land. I am informed that even after all is said and done the City still apparently generates more tax revenue for the UK government than the whole of Scotland.

It is easy to stand up and demand that surplus be delivered to the community rather than paid out in bonuses and dividends. Bonuses – fair enough – but dividends? Whoever, other than the government, would invest in banks for a zero dividend? Equity investors, who are, after all, the suppliers of the economic capital, will walk away – and quite rightly so too. It is already hard enough to make a case for existing shareholders to partake in the banks’ capital raisings and the further dilution in the value of their investments, especially as revenues and profits are under severe pressure. To now decide to try to skim cream off the bottle of semi-skimmed or even skimmed milk looks mad.

We are experiencing the all the effects of the painful process of deleveraging the global economy; corporate have largely done it, households are trying to and sovereigns… well, it depends on who and how. Although a transaction tax might be useful in returning capital markets to their original purpose, it should not be proffered as a cheap and easy source of unimaginable fiscal revenues. That might have disastrous and unintended consequences, especially if running a bank finally ceases to make business sense.  

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