By Martin Banks - 7th November 2012
The more mobile a tax base is, the more loss there will be
Plans to impose tax on financial transactions among 11 member states is a "dangerous move" that might harm Europe's economies rather than help to boost their competitiveness, claims a new study.
The study argues that as financial transactions are "highly mobile, even low levels of taxes will force out trade to other nations".
It says such a tax means "it is quite possible that market volatility will increase rather than decrease due to such taxes".
When a transaction tax on stock trading was imposed in Sweden between 1984 and 1991, the result was a "dramatic" reduction in home market liquidity as well as increased volatility.
Since the world economy has become more globalised since, the attraction of a financial transaction tax should be even less now, says the report.
The report calls on Europe to "learn a lesson" from Sweden, which abandoned the financial transaction tax more than 20 years ago.
The study was compiled by New Direction - The Foundation for European Reform, a think tank, in cooperation with Captus, a Swedish free market think tank.
The author of the study Nima Sanandaji said, "It should be noted, that the proposed taxes are levied on tax bases that can move from one country to another.
"The more mobile a tax base is, the more loss there will be, because people and companies might opt for countries outside of the EU to avoid the tax."
He said there were several reasons against the tax.
The overall tax levels in many EU member states are already so high that they significantly reduce incentives for work, education and entrepreneurship.
Imposing such taxes has proved to be damaging in the past, he said.
"When a transaction tax on stock trading was imposed in Sweden in 1984, the result was that much of the trade migrated to New York and London.
"The costly policy was abandoned in 1991."
"Tax increases are not only less likely to contribute to debt reductions, but would also hamper long-term economic growth, which is now under threat of a new downturn.
"Introduction of the proposed direct EU taxes would come at a high price for EU member state economies, at a time when lower, not higher taxation, is needed to encourage growth in many EU member states."