It’s easy to understand why the European Union wants to slap a tax on financial companies when they buy or sell stocks, bonds, and derivatives. Europe is still grappling with fallout from a global recession triggered by the financial industry’s recklessness. And oh yes, there’s that $40 billion in revenue that the tax is estimated to raise.
Sweet revenge? Bitter disappointment is more likely. Earlier attempts to tax financial transactions have spectacularly failed to meet revenue expectations, as trading activity simply moved abroad.
Consider what happened in Sweden after transaction taxes were introduced there in the mid-1980s. “Taxable trading volumes fell sharply, and actual tax revenues were less than 5 percent of the expected amount,” as 80 percent of bond trading moved offshore and the options market dried up, says economist Andreas Johnson of Swedish bank Skandinaviska Enskilda Banken (SEBA). “By the end of 1991, these taxes had been abolished completely.”
Source: Bloomberg Businessweek. Read full article. (link)