Logic Will Prevail in the EU Financial Transaction Tax Debate

January 13, 2012

As Will McBride posted this morning, imposing a financial transactions tax seems to be all the rage in the European Union.  France says it will go it alone if need be.  Germany claims it's dedicated to joining.  And now we're seeing indicators that Austria and Italy could jump on the bandwagon.

The reality is that it will never happen for an extended period of time.  I cannot express the word never enough.

Think about it this way:

You own a small business that sells the same good as all 30 businesses in your neighborhood.  Add to this the fact that each business is directly adjacent to or across from another so that the effort customers must exert to search for the best price is minimal.  For some reason, you increase the price of your good by $1.  On a price basis, you will lose all of your customers to your competitors.

This is how France is thinking of doing business.  Except they claim that if everyone gets on the bandwagon, no one will lose business (all prices would increase by $1).  Sounds reasonable but for one fatal flaw: everyone has an incentive to discount their price if everyone else is selling at that $1 premium.  One by one, the businesses would drop price to its pre-premium level.

This is why a worldwide move to institute FTTs has never occurred.  The financial incentives to break from the agreement are simply too high.  Knowing this, rational countries such as the United Kingdom look forward and reason backward.  Not only will the experiment cost money, it will fail.

Keep an eye out for more countries to join the FTT chorus, but unless it includes every industrialized financial capital in the world, the status quo will remain—as well it should.

Follow David S. Logan on Twitter @Loganomix

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