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Tuesday, September 27, 2011 3:41 PM

Europe Plans to Tax Stock and Bond Transactions .1%, Derivatives .01% Despite US Objections; Expect More Crashes Should it Pass

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Europe plans to raise as much as 50 billion Euros annually with a financial transaction tax. If they are looking to increase volatility, remove liquidity, and increase the odds of a crash, then such a tax may "help".

Please consider Brussels to release financial tax plan despite US objections

The European Commission approved in principle the tax proposal on Tuesday, and the head of the EU executive Jose Manuel Barroso may outline the plan on Wednesday in a "state of the union" address to the European parliament in Strasbourg.

On the commission's drawing-board for more than a year, the idea was given fresh impetus last month when given the nod by Europe's power couple, French President Nicolas Sarkozy and German Chancellor Angela Merkel.

"The idea is to force a contribution from the financial sector, which enjoys fiscal privileges thanks to a sales tax exemption, meaning it saves 18 billion euros a year in Europe," an EU source told AFP on condition of anonymity.

If adopted -- not before 2014 -- the tax could ring in between 30 billion and 50 billion euros a year -- possibly half for the European Union budget, the remainder for national governments.

The rate suggested would be minimal with member states free to hike the tax.

The financial transactions tax is slated to target a wide field, with the latest known proposals aiming to slap 0.1 percent on shares and bonds and 0.01 percent on derivatives.

While Merkel and Sarkozy offered no details on the tax in August, their support helped send shares into an immediate tailspin with financial sector players warning the measure would push business away from Europe.

Britain, at the heart of the financial industry, reiterated demands for any such tax to be applied globally. "Otherwise the transaction covered would simply relocate," a Treasury spokesperson said.

But a source close to experts drafting the proposals said the research on the issue was "reassuring", with negative impact deemed "negligeable" when compared with Europe's overall attraction to financial transactions.

The tax, the source added, would include a principle of territorial location to avoid relocation.

"A non-European bank registered in Europe for certain transactions could be considered to be established in Europe. The tax would not be based on where transactions take place but on the parties involved."
Reduced Liquidity Increases Chance of Crashes

Short term traders add liquidity. Would .1% drive them away? Yes, it might. Think of it this way, 10 quick flips is 1%. 100 trades is 10%. In the short-term trading world 100 trades is not a big number.

What about computerized trading? I fail to see how that is any different.

Reduced liquidity increases the chances of crashes. Thus, the financial transaction tax will not help anyone, and that includes long-term hold types.

Mike "Mish" Shedlock
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