The European Union’s executive body, the European Commission, has proposed a financial transaction tax be applied within the bloc to raise some €57 billion a year.

The tax, due to be implemented in January 2014, would mean that there would be a 0.1% tax applied to bond and stock trades and 0.01% on derivatives trades.

But who will ultimately pay?

When announcing this at the EU ‘State of the Union Address’, a smiling José Manuel Barroso, European Commission president, said to much applause that the banks should give something back to society after receiving guarantees of €4.6 trillion from the taxpayer.

This proposal will attract much criticism and opposition, not least from the UK, which will see this as a direct attack on the City. The largest complaint being that, without global application, this will just drive the financial services industry out of the EU.

A UK Treasury spokesman said "The government will continue to engage with its international partners on Financial Transaction Taxes and has no objection to them in principle. But any financial transaction tax would have to apply globally and there are a number of practical issues that need to be worked through."

This tax, which sounds very attractive in an age of banker bashing, should only be considered successful if it reduces the power of the banks, limits the bonuses paid out to top bankers and makes the banks work harder for the people and economies they serve. But will it?

Barroso said that revenue should be raised from financial services, not from labour or consumption. But far from taxing banks, this system may well end up as banks acting as tax collectors while they just pass on the full cost (plus administration fees if they can get away with it) to the trading public. This will not just hit traders it will also hit pension funds.

The tax could then affect long term savers who use pension funds or managed services for their stocks and shares ISAs where trading is part and parcel of managing the funds’ risks.

But the real questions that people should be asking are:

  • Into which pot is the tax going to go?
  • What will the money be spent on?
  • Which other taxes will be reduced to compensate for it?

If the answer to the last one is ‘none’, then the size of the political state will get larger, taking more of your money to spend on things you may not want it spent on. How on earth is that meant to promote growth if they are taking your money out of your pocket? Or maybe they think, in their socialist way, that they know better than you how to spend the money that you have worked to earn.

The tax may also start to reduce overall trading levels so increasing market volatility.

One other thing to consider is the impact this may have on high frequency trading. Would you want to pick up that bill? Maybe the small price advantages this gives would no longer be worthwhile chasing.

Image-Wikimedia Commons/flickr/MEDEF

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