What you can learn from the European bank tax

Jose Manuel Barroso, president of the European Commission, has today announced proposals for a financial transaction tax on banks across Europe. The UK Treasury immediately said that it would absolutely resist any tax that was not introduced globally. The impact is larger on the UK as the majority of European financial transactions take place in London, about 80% of the revenue raised would come from London.

The Commission responded to the UK threat of a veto by saying that they would implement the tax in the rest of Europe anyway.

Why would Barroso say that Europe would go ahead with a tax even without the UK?

Surely it is better for him to say that the tax will only go ahead if everyone in Europe agrees to it. This approach would aim to embarrass the UK into agreeing to the tax otherwise the whole of Europe would miss out on potential revenues.

This isn’t the best tactic.

By saying that the tax will go ahead anyway he has very little to lose. Banks that are operating in mainland Europe (not in London) are unlikely to move because of a tax, if they wanted to move then they would probably already have moved to London anyway. So he will gain revenue by implementing a tax and put the UK in a difficult position for not supporting the rest of Europe.

The other advantage of going ahead without the UK is that it will be a permanent embarrassment to the UK as there will always be the difference in taxation. If he only agrees to go ahead with the agreement of the UK and the UK veto then nothing will happen and it will soon be forgotten about.

The UK is worried about losing business (and tax revenue) to the US, so this problem really need a global solution.

Of course if the banks actually did what they are supposed to do and provided capital to help businesses to grow and produce things of value then there wouldn’t be the same problem. Most companies, apart from large multinationals, would want to deal with banks in their own country and the threat to move would be weaker. It is only possible for the banks to threaten to move so easily because they are just shuffling money around in transactions that don’t actually create anything physical so there is no real things to tie the transactions to a specific country.

Today’s takeaway: Don’t get hung up on getting a unanimous decision, sometimes you are better going alone.

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