As the tax reform debate begins to heat up, businesses and investors are beginning to pay closer attention to the House GOP Tax Reform Blueprint, a tax plan released last June by Speaker Paul Ryan and House Ways and...
- The Tax Policy Blog
- Logic Will Prevail in the EU Financial Transaction Tax De...
Logic Will Prevail in the EU Financial Transaction Tax Debate
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
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.