Banks vs Transaction Taxes

The EU is contemplating a financial transactions tax, with two thirds of Europeans in support and the banking lobby against.  From a recent article in Der Spiegel:

Speaking directly after Schäuble, Luxembourg Finance Minister Luc Frieden showed why the lobbyists, and not democracy, were going to win out on that day. "We have to think about the competitiveness of the financial industry," he said. The small country between the Mosel and Sauer Rivers earns 24 percent of its gross domestic product with banking products. 

"There are many good reasons to exempt the investment industry from a tax on the financial sector," the Association of the Luxembourg Fund Industry had told the country's finance minister before the meeting. In addition to Luxembourg, the Maltese finance minister also voiced concerns. The banking system is the blood veins of the global economy and must be treated with caution, he said.

The article discusses the predicted effects of broader or narrower transaction taxes on the European and American markets, and concludes:

It is considered certain -- and desirable -- that a general tax would change practices in the financial industry. The European Commission, the EU's executive, forecasts that 15 percent of securities and 75 of derivative deals would be eliminated in the future because, with the new tax, they would simply not be profitable anymore.

Critics of the financial system, like London economist Paul Woolley, view this as the most important benefit of a financial transaction tax. "It's critical that we increase the cost of potentially dangerous transactions that are also highly questionable from a social standpoint."

The EU continues to negotiate over the tax without the benefit of Britain's participation, as David Cameron is solidly against:  ''I will block it unless the rest of the world all agreed at the same time that we were all going to have some sort of tax.'' 

Dan Shaviro discusses the merits of a financial transactions tax versus a financial activities tax here, or you can use a short cut and just watch him talk about it.