Tobin or Not Tobin
Eleven eurozone nations got the green light to enact a financial transaction tax (aka Tobin tax) on Tuesday, with EU finance ministers approving it under “enhanced cooperation” procedures—an EU treaty provision allowing at least nine EU states to pursue common policy absent EU-wide agreement. Twenty-four nations voted in favor, with the UK, Luxembourg and the Czech Republic abstaining.
Predictably, EU bureaucrats and the participating nations—France, Germany, Spain, Greece, Italy, Portugal, Austria, Belgium, Estonia, Slovakia and Slovenia—were beyond excited. EU tax commissioner Algirdas Semeta called it a “milestone,” Austria’s Finance Minister deemed it an “important signal ... [that] markets will have to contribute their part to stabilization,” and German Finance Minister Wolfgang Schäuble called it a “good step” toward making the financial sector accountable for “the costs of the financial crisis.” In our view though, these purported Robin Hood aims seem dubious for a tax that will mainly hit pensioners, depositors and retail investors—banks have a knack for passing such penalties on to consumers. Assuming, that is, they don’t simply take their trading activity elsewhere—another thing banks tend to do when hit with new taxes (as Sweden can attest). Financial institutions could very well shift more activity to London. Or those wishing to stay in the eurozone could move from Paris and Frankfurt to Ireland, where there’s no transaction tax and corporate rates are only 12.5%.
That said, a few hurdles remain before the tax takes effect. The participating nations have only agreed on the tax in principle—details remain up in the air and will likely inspire heated debate. Among them: Will both parties to a trade be taxed even if one is in a non-tax nation? Which assets/trades will be taxed, and will primary market purchases of sovereign debt be included? And, most contentious, where will the revenue go? In our view, that’s a lot of fuss for a tax that probably won’t raise much revenue and could have a deleterious (albeit, small) economic impact. But in this case, these nations’ loss is likely the UK’s, Ireland’s and every other non-tax nation’s gain.
Flying Under the Carbon Tax
Late last week, the German government canceled a key carbon permit auction due to lackluster demand, ultimately sending carbon prices in the European Union’s Emissions Trading System (ETS) to a record low of less than €5 a ton and raising new doubts over the bloc’s scheme to reduce emissions.
As with any time governments monkey with markets, the opportunity for unintended consequences is vast. In this instance, the ETS over-allocated carbon permits across the 31 participating countries (and 12,000 or so companies that must comply with it), failing to account for likely already reduced emissions in the region (either because of advances in energy efficiency or because of companies simply relocating their carbon generating operations to friendlier locales) and overall less economic production (and thereby carbon generation) than forecast.
Many folks have proposedvarious “fixes” for the market, including instituting a price floor on carbon per ton, postponing sales of carbon permits (backloading), canceling new sales or accelerating the pace of carbon reductions in the ETS to 2.5% per year from the current 1.74%. But we’d ask, what happens when carbon production ramps up again? Would the ETS intervene again and issue new permits? Or reduce the pace so as to not stymie economic activity? And if so much regulatory tweaking and intervention is always required, how free is the market anyway? This highlights the fact that the ETS isn’t a very market-based scheme at all, but rather an opportunity for governments to tax under the guise of reducing emissions and stimulating investment in green technologies—while simultaneously failing do to either very well.
Another key example of such schemes’ unintended consequences? EU airlines turned a profit of nearly €486 million in 2012 as a result of passing along the anticipated costs of a new carbon tax on EU flights to customers. Although the EU commission ultimately suspended the rule for a year at the behest of foreign governments who argued the rule violated international law, EU airlines likely still complied with the law on the off chance they’d be stuck with a bill anyway. And who paid the price? Consumers, in the form of higher prices to fly into and out of Europe.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.