Taxing the rich to feed the poor is a legitimate demand. But a FTT seems to confuse virtue with vice. Image Source: Thelocal

In the joint letter of French President Sarkozy and German Chancellor Merkel a clear statement is made towards imposing a Financial Transaction Tax (FTT). It remains unclear which transactions will be affected, to what degree and what will be the geographic application of this policy (whether it will be EU-wide or confined within the eurozone). From the letter itself we get the following:

We have asked our Finance Ministers to work on a joint proposal on a Financial Transaction Tax by the end of September, in order to contribute to the work of the European Commission

The determination of the leaders of the so-called Franco-German axis is crystal clear. The point now lies in the technicalities of this idea, which are still unknown and thus I cannot comment on them. What I can do though is comment on the idea of the Financial Transcaction Tax (FTT) and on the “Robin Hood tax” that has become so popular lately.

A FTT is a very attractive idea as it offers the impression of taxing the rich to redistribute the money to the poor. However it is never that simple and in our case the FTT confuses virtue with vice. The rich sure need to be taxed and the cocktail parties and the bonuses of those who make billions in profit should not be paid by the the other parts of the income distribution as is the case today, however a FTT might not be a social measure as some wish to present it. To understand why that is most probably the case we need to consider two very important parameters that can make the FTT yet another measure that will deprive the vast society from a portion of its income.

First parameter is the scope of application of the FTT. Should the tax be implemented on all financial transactions it will directly affect almost everyone in the society, from the business community, which includes both small family businesses and large corporations, to the ordinary depositor and even to the ordinary tourist (if the tax is applied on currency exchange). So it is important to know which transactions will be affected.

I cannot think of any transaction that is purely confined within the banking sector, thus so far it seems to me that this tax treats all parts of the income distribution and all sectors of the economy, horizontally, unless there will be progressive taxation which is quite complex and not easy to implement.

Second parameter is the geographic application of this new tax which has two scenarios. A eurozone-wide application of this tax or an EU-wide application. The first is if it is confined withing the eurozone, then what will happen is that the 17 countries of the eurozone will openly adopt a “beggar thy neighbor policy” on all the rest European economies that comprise the single market. That will firstly make everyone outside of the euro area, who trades with that area, worser-off but at the same time it will render the euro area a less favorable destination, thus making it less competitive on the global level.

The first scenario will create a two-tier EU with countries in and out of the Euro having huge dissimilarities while being part of the same market. This is very similar to the sort of systemic flaw that was deeply seated in the architecture of the euro and has created divergence and huge gaps in competitiveness within the euro area.

The second scenario, that of an EU-wide application will make the Union a far less competitor on the global level, where capital moves freely and knows no “homelands”. So it will further worsen the position in which European countries are now into, by preventing a considerable amount of foreign capital from entering Europe. (For those of you who are interested in real world facts about the implications of this policy, see the research paper from the Adam Smith Institute).

Geographic application is of cardinal importance in today’s globalized world. If we have the good will to assume that this tax will be designed in such a way, so as not to deprive the vast society from its income and if we believe that it will be worked out in order to tax the banks and only the very rich, then we still need to have a global application of this principle for it to be effective otherwise it will produce adverse effects on the countries that will adopt it, since capital will flee in search for other cheaper resorts.

These are some issues that need to be taken into serious consideration. However I am afraid that we all get stuck in the nice rhetoric politicians tend to use and in the smart use of popular myths such as “Robin Hood Tax” and fail to see that most of it is only serving for the campaigns of certain politicians who will soon have to run for elections.

I personally am in favor of taxing the very rich, but I doubt the real intentions of our leaders. If they really wanted to be in favor of the poor they would not ask for front-loaded austerity measures that only make the poor worse-off. They would not design bailouts that are only directed to pay back the creditors of the countries who receive them (the banks).

They would speak about “economic governance”(or “economic government”), with an emphasis on the need to tackle the huge issue of unemployment, especially among the youth, with proposals to stimulate growth, with measures to regulate the banking sector (not just taxes but a proper legal framework).

Since they have done nothing of the above I have every reason to doubt them, so I also doubt this FTT is as good as they want to present it. Calling it a “Robin Hood Tax” certainly makes it attractive (and brings votes), but do not forget that Robin Hood was not against monarchy, he was only against Prince John. In our case we should be against “monarchy” altogether.

Is a Financial Transaction Tax a good idea? | Protesilaos Stavrou.