Tobin, or Not Tobin?

Europe's Tobin tax retreat must go further

After months of harsh criticism, the only way to save Europe's flawed financial transactions tax (FTT) was to dilute it. Brussels has conceded as much and is working on plans to introduce a smaller and less extensive levy more slowly, according to Reuters.

FTT Mark II will have a standard tax rate of 0.01 per cent on the value of trades for both bonds and shares. The original proposal was 10 times higher. A tax on derivatives trading, which had been included in the plan, has been delayed indefinitely.

The retreat on bonds is easy to understand. True, if new paper were merely sold and held, issuers would not have had reason to object strongly. But consultancy London Economics estimated that a 0.1 per cent levy (10 basis points) would have effectively lifted corporate funding costs by as much as 1.0 percentage points (100 basis points) in some countries. It would have added three per cent to the UK government's borrowing costs.

Brussels also looks set to relent by exempting the repo market entirely. That too is readily comprehensible. For the frail banks of Greece, Italy, Portugal, Slovenia and Spain, five of the 11 countries which backed the tax, the charge on short-term funding could have been painful.

What's left? The shrunken Tobin tax may still make markets healthier, one of the original objectives, although it looks too low and narrow to do much to slow trading and curb speculation. As for derivatives, the abdication of the FTT leaves Basel III and other regulations to purge market excesses.

The other aim of the FTT was to make banks pay their way. That now looks dead in the water. But the FTT is a crude tool for extracting revenue from a complicated industry.

Proponents of FTT will be hoping for a Mark III which inhibits more pointless trading and brings in more revenue. It would be more sensible to scrap all charges on bond trading, as that is a market which helps the economy. And rather than try to tame the financial beast while it is moving, extract its treasure while it rests - with a levy on balance sheets or earnings.