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Vladimir Harman

Vladimir Harman

I began my journalistic career at the Radio Free Europe/Radio Liberty (RFE/RL) in Prague where I worked at the section broadcasting to Afghanistan. After eight…

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Noble Notion vs Reality

Seventy six years have passed since the first notion on taxing financial transactions first appeared under the pen of John Maynard Keynes in his study on Theory on Employment Interest and Money. But the idea to tax multi-billion financial transactions has remained yet to be implemented.

The latest effort to introduce the financial transactions tax came from the very heart of the European Union.

The European Commission, the executive arm of the EU, suggested last year in September that Europe should introduce a so-called Tobin Tax, a tax named after an American economist James Tobin. The purpose of the levy was to raise money by taxing the share dealings as well as financial products trading with 0.1% and 0.01% rates respectively.

The suggestion from the EU Commission came when the Eurozone was severely swept by one of the most devastating fiscal and economic crisis in the history of the European Union.

At that time, member states of the Eurozone felt rather enthusiastic about the notion of easy money raised from taxing the multi-trillion securities and exchange businesses. France was the staunchest supporter of the idea, while countries such as Britain or Sweden were strictly against.

Enthusiasm for Tobin tax fades

Since last September, the mood within the EU member states seems to have changed with the enthusiasm to introduce the Tobin Tax fading down significantly. All that despite the fact that EU Commission president Jose Manuel Barroso said the tax could halve member states' contributions to the EU budget.

Eurozone and the EU finance ministers are meeting on March 30-31 in Copenhagen to discuss the matter of the tax on financial transactions again with the aim to look for possible ways to make the tax work. Germany's finance minister, who once supported the idea of Tobin tax, said that the current plan is far from being technically executable at the moment.

Tool and deterrent at the same time

The idea of the Tobin tax applied inside the EU have caused certain amount of political frictions among the member states. For some, the idea of introducing Tobin tax does the job of luring potential voters, while for the others, the Tobin tax poses a severe danger of losing the status of a global financial center.

France, with Nicolas Sarkozy in the lead, is a staunch supporter of the tax. Even though that the idea of taxing the voluminous financial transactions was meant to be a joker in the hand of the French socialists, with Françoise Hollande as their presidential hopeful in the upcoming May elections, current president Nicolas Sarkozy was quick enough to acquire the idea as his own weapon to win over the voters from the camp of the Socialists.

In Britain, the current government have been fighting hard to distance itself from the financial transaction tax as much as possible in order to protect the City of London – the financial hub of nearly all of the European Union's financial transactions. Westminster argues that introducing the tax only in Europe would hurt the British as well as European economy significantly with many financial companies now based in Britain, or the mainland Europe, moving overseas to avoid the tax.

Control problem

There are many who do not necessarily criticize the notion of taxing the huge volumes of securities and currency exchange transactions, but they argue that it is extremely difficult to control the taxation process at the moment. Especially in such a hazy environment as the current global financial markets.

The thing is that currently there seems to be no reliable and comprehensive scheme designed that could track all derivatives and exchange global transactions as well as tax avoidance attempts at the same time.

In other words, how can one supervise tax collection on financial products when, or if, those products themselves are extremely difficult to regulate and control.

For example, Swiss global financial services company UBS's derivatives trading scandal is one of the latest examples of exploitation of regulatory loopholes in the securities trading. Mr Kweku Adoboli, director of exchange traded funds (ETF) and delta one trading at UBS, blew off nearly £1.3 billion during his high-risk trading at the ETF desk last autumn.

Even James Tobin had once said that his own tax idea was unfeasible in practice. However, Joseph Stiglitz, former Senior Vice President and Chief Economist of the World Bank, argues that the modern technology should nowadays enable regulators to supervise electronic tax collection more easily.

For the moment, the notion of the Tobin tax will most likely remain only as a tool for the politicians from both the left and the right of the political spectrum. The leftists and the socialist will keep supporting the idea along with the charities and the NGOs like Stamp Out Poverty or the United Nations.

On the other side, the banks and securities traders, intoxicated by huge volumes of money, will strongly oppose the idea bearing in mind they might be losing billions to the cause of the charities, or to the survival of the European Union, instead of investing the money back into speculative trades.

By. Vladimir Harman, WBP Online Correspondent in London

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