Pensions industry veteran Peter Kraneveld questions the wisdom behind the European Commission’s recent proposal for a ‘financial transaction tax’, or ‘Tobin tax’.

I am an economist. Economists must be pitied. Economic theory is based in nonsense such as “all people will react rationally and in their own best interest to changes in their economic environment”, and tested under nonsensical assumptions such as “all things being equal”. Then, they top it off by creating a mathematical model that is at the same time unbelievably complex and a very weak representation of reality and use it to produce nonsense they call “predicting the future”.

Maybe there are no economists working for the European Commission. It would be the just reward of both economists and the European Commission. It would also explain a proposal for a financial transaction tax in the EU’s 27 member states. The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. The exchange of shares and bonds would be taxed at a rate of 0.1%, and derivative contracts at a rate of 0.01%. This could raise approximately €57bn every year. The Commission has proposed that the tax come into effect from 1 January 2014.

Economists are familiar with such an instrument. In their innocence, they call it a ‘Tobin tax’. Aforementioned economists love to theorise about it. Originally, it was proposed for currency transactions and meant to tame ‘hot money’, but the markets for equity and bonds are deep enough to be considered largely equivalent. Derivative markets are quite liquid, but not as deep, which may explain the lower tariff proposed.

Proponents of the Tobin tax argue either that tax income is fun (they don’t call economics the dismal science for nothing) or that the tax will cut down on churning (turnover). Detractors say even a minimal tax rate will have a huge impact on where transactions take place, and that the Tobin tax works only if it is applied to all transactions worldwide. Proponents foresee what the Commission calls “making the financial sector pay its fair share”, while detractors believe the sector will pay little or nothing and simply leave London, Frankfurt or Luxembourg. Thinking about that, I can’t help concluding that it would be a cheap and easy route to follow.

There has been a practical attempt to introduce a Tobin tax. Once upon a time, Chile was the hottest destination for hot money, receiving more foreign indirect investment than it could handle. A Tobin tax, indeed, brought back a degree of sanity. But eventually, Chile became a less hot destination, and the Tobin tax was immediately repealed. Somehow, I have trouble imagining the EU as by far the best place on earth to do financial transactions, but I am an economist, not a politician.

The EU proposal will now be discussed in member state governments, some attaching some importance to the financial centres within their borders. I hear they employ economists…

Peter Kraneveld is owner of the Netherlands-based consultant PRIME and a former chief economist at Dutch asset manager PGGM