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Financial-transaction tax proving to be alluring, detrimental

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Taxing finance is easier for European politicians than taking responsibility for it.

This week saw dramatic all-night talks among European Union finance ministers on a common euro-zone bank regulator -- and overwhelming support in the European Parliament for plans by 11 EU states to pioneer a harmonized financial-transactions tax, starting in 2014. The aim of the FTT is to generate revenue and to reduce systemic risk by dampening excessive trading. Hungary, and perhaps Italy and Spain, may impose their own FTT earlier, in January 2013.

France is already partly there. In August, it slapped a 0.2-per cent tax on the purchase of shares in French firms with a market capitalization of more than $1.3 billion, among other things. The French government has projected revenues from its FTT at 170 million euros this year and 500 million next year. Nov. 9 was the first tax-collection date. The EU countries planning their own FTT are keen to know how the French are doing, but so far there has been a deathly hush from the French Treasury and from Euroclear France, the central securities depositary which is acting as tax collector.

Analysts are beginning to draw some tentative conclusions, however.

French equity trading has not fallen off a cliff: Volumes dipped in August, then recovered somewhat in September. Trading activity in French equities across Europe fell by 16 per cent in the three months after the tax was applied, though, compared with levels in May to July, according to Equiduct, an electronic-trading platform. That is a notably bigger drop than was seen for other European stocks.

The fall was deeper in lower-capitalized stocks subject to the FTT. Trading in stocks not subject to the tax actually rose by 19 per cent. This suggests the tax has changed investment patterns to the detriment of mid-sized firms. Research by Credit Suisse shows a similar pattern.

That could act as a warning for countries contemplating an FTT that also want a healthy market for smaller stocks. In Austria, where all the political parties support an FTT, the Vienna Stock Exchange sees the proposed tax as a threat to dwindling liquidity in Vienna, and even more so to its clutch of affiliated exchanges in Budapest, Ljubljana and Prague.

"We would like an FTT to concentrate on over-the-counter products rather than exchange-traded ones," a spokesman says.

There are differences between the French tax and the proposed EU one, which aims to tax financial institutions a minimum of 0.1 per cent on purchases of shares, bonds and other securities, and a minimum of 0.01 per cent on the notional amount of derivatives traded either on or off exchanges. The early evidence, however, will reinforce the skepticism of countries such as Britain and Sweden, which oppose a new FTT unless it is part of a wider global effort.

They see too many potential loopholes. Investors already may be getting around the French FTT via futures and other derivatives, ploys long used to circumvent Britain's share-purchase tax. They also point to unhappy previous experiences with FTTs: A recent Bank of Canada report went through a litany of cases, including a tax imposed by New York State from 1905 to 1981 and a Swedish tax imposed in 1984, and found that all seem to have raised volatility and reduced liquidity.

Then again, is liquidity really so sacrosanct? Statistics from the Federation of European Stock Exchanges show that, on an average day in 2011, there were 6.3 million equity trades, of which only 142,000 resulted in stock being delivered to a beneficial owner.

Republished from the Winnipeg Free Press print edition December 15, 2012 A17

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