French president Nicolas Sarkozy and German chancellor Angela Merkel have thrown their weight behind a new “financial transaction tax” – dubbed by markets as a “Tobin tax” after the economist who first proposed the concept in the 1970s.
Their support, announced last week, should come as little surprise. European leaders are eager to reduce recent volatile market swings. Some policymakers argue that a tax on high-speed trading is one way to reduce short-term speculation and hysteria.
However, including private equity transactions in such efforts would penalise an industry that already does what lawmakers are ostensibly intending to encourage: long-term investing that only pays out a profit if proven a sustainable success.
Via their respective finance ministers, Germany and France will work alongside European commissioners in detailing and releasing a proposal before G20 leaders meet in September.
What remains unclear is if the proposals will provide a carve-out for assets held for long-term periods. This is worrying for GPs. Especially considering tax authorities are sometimes hesitant to create exemptions which could be in some way exploited, so says one London-based lawyer.
Other questions centre around if the proposed tax would apply at the eurozone level or on a wider European Union basis. If only applied at the eurozone level, it’s safe to expect the UK would benefit as eurozone traders seek tax-refuge in London markets.
Indeed a spokesperson for HM Treasury said the government will engage other EU member states on the proposal but “any financial transaction tax would have to apply globally – otherwise the transactions covered would simply relocate to countries not applying the tax”.
Whatever the case, and whatever the proposal’s geographic scope, it’s important that policymakers recognise the tax’s potential unintended consequences.
A tax slap on an industry already left grappling with an unprecedented era of oversight and regulation is no way to calm market concerns.