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From the FT's Lex blog



This time it looks like they mean it. The European Commission has put numbers to its plan for a financial transaction tax. The rate will 0.1 per cent on stocks and bonds, and 0.01 per cent on derivatives. The technocrats say it will get going in 2014. Good luck to them.



There is a reason why "Tobin taxes" have regularly been mooted, for four decades. In theory they can discourage speculation while promoting long-term behaviour. Such consummations are devoutly to be wished. But there is also a reason why true Tobin taxes have never happened. In practice, nobody has found a way to make them work.

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The key issue is avoidance. Unless all jurisdictions set a unified tax, Tobin taxes become an invitation for financial engineering, and a marketing tool for offshore centres.



On this basis, the tax as currently proposed looks set to fail. It will tax transactions between institutions when at least one party is located in the European Union. That suggests that traders will be able to avoid it by playing games with relocation. A more promising avenue might be to levy it depending on where the assets originate. It is hard to argue that a French government bond originates in Bermuda. Such an approach, following moves on both sides of the Atlantic to level the playing field among trading venues, might even help regulators build an audit trail of where assets whizzing around the system truly originate.



The EU also needs to be clear why it is doing this. Tobin taxes are not about revenue-raising, or about delivering social justice. And the EU must accept that lower trading volumes, and hence profits and taxes of financial institutions, would be a direct consequence. But in the unlikely event that politicians avoid both populist distractions and industry lobbying, and seriously attempt to crack the problem of avoidance, they deserve to succeed.

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