France’s Tobin Tax will make a little but damage a lot
WHEN Napoleon Bonaparte’s regime executed an aristocrat on trumped-up charges of treason, stirring up bloody memories of the Revolution, his chief of police is said to have remarked that it was “worse than a crime; it was a blunder”.
The same could be said of this week’s introduction of a Tobin Tax in France. The measure imposes a 0.2 per cent tax on purchases of shares in any publicly traded company with a market cap above €1bn (£789m), on “naked” short sales of sovereign credit default swaps, and on some high-frequency trading.
This is a form of the EU-wide Tobin Tax on all securities exchanges proposed by Nicholas Sarkozy last year. Though less disastrous than that would have been, the unintended consequences of this tax may leave President Francois Hollande wishing he had let these proposals die along with the Sarkozy government.
For a start, the tax is unlikely to raise any money. The French government estimates that it will raise €500m next year, a small enough figure even before you remember how bad governments have been at projecting Tobin Tax revenues.
When Sweden introduced a Tobin Tax in the eighties, it overestimated revenues by forty times the amount raised. Many exchanges simply moved to Canada, where transaction taxes like stamp duty are less onerous. Sweden abandoned its Tobin Tax in under 10 years and has been a vocal opponent of any EU-wide introduction.
More worryingly, the empirical evidence suggests that transaction taxes make markets more volatile, not less as their supporters claim. High-frequency trading adds volume and liquidity to markets, reducing volatility. One important role that financial markets play is in making asset prices reflective of real-world conditions. High-frequency trading allows markets to be highly sensitive to new information and to intermediate between buyers and sellers who may not be in the market at the same time. Stopping high-frequency trading would have the effect of making price shifts more sudden, unpredictable and larger.
The economist Tim Harford uses the example of ATMs to explain how Tobin Taxes can lead to this volatility. If all cash machines began to charge a fee, people would save up their withdrawals and only make them once or twice a week. This would mean larger withdrawals and a greater potential for sudden machine-emptying accumulations.
Prices reflect real-world information. Stopping trades acts as a blindfold, so that real-world information is less clear, making markets less grounded in reality. We don’t have to look far back to see how dangerous that can be.
Perversely, Paris’s difficulty may be London’s opportunity as French trading moves across the channel. But this is scant comfort for seeing our neighbour dig itself into a deeper hole. Along with policies like the 75 per cent upper tax rate Hollande proposed during the election, the French may soon regret electing their blundering new President.
Sam Bowman is policy director at the Adam Smith Institute.