EUROPE - The European Commission's recent proposal for a 'financial transaction tax' - or 'Tobin' tax, after Nobel Laureate economist James Tobin - has been greeted by a chorus of boos from industry experts, who have questioned the plan's focus, feasibility, consequences, scope and motives.

On Thursday, the Commission published a draft proposal to make the financial sector "pay its fair share", reduce "competitive distortions" and discourage "risky trading activities".

Beginning in 2014, the tax would charge 0.1% of all bond and equity trades and 0.01% of all derivatives trades.

It would be levied on all transactions between financial institutions when at least one party is located in the EU, and it would apply to all 27 EU member states.

But Amin Rajan, chief executive at CREATE-Research, suggested the proposed tax was being used as a sort of collective punishment of the financial sector.

"When professor Tobin first proposed the tax more than 40 years ago, his aim was to create a level playing field," he said. "Now, the idea has been resurrected as a stick to beat the bankers for bringing the global economy to its knees."

Rajan also questioned the plan's chances of survival.

"Given the clout of the global banking lobby, it is unlikely countries like the US and the UK will entertain the proposal, despite the sound and fury from the European Commission," he said. "We need time to embed the latest banking regulation before considering this ambitious idea."

In the UK, Antony Barker, managing director at Pension Capital Strategies, criticised the plan's focus, timing and scope.

"It's not a tax on the bankers and traders - it's another tax on investors, whom everyone needs to bail out," he said. [And] with a delay until 2014, it's not even 'new money', which is what is needed. [It's] a great example of behavioural management, where we find it much easier to agree to 'healthy living' tomorrow."
He also criticised the proposal's provincialism.

"It's not even an all-Europe solution to what is clearly an all-world problem," he said. "Consequently, the stomach-churning 'vomitility' in markets will continue for some time yet."

Toine van der Stee, chief executive at Blue Sky Group, argued that taxes ought to be levied on 'value added' only. The transactions targeted in the proposed tax do not add value, he said, and therefore should not be taxed.
"In the Netherlands," he said, "we have a tax on real estate transactions. Economically, it only has negative effects, such as on mobility. Everybody knows this, but, because it is such a major source of government revenue, it may be there for many years to come. The same may happen with this new tax."
Peter Kraneveld, owner of Netherlands-based pensions consultant PRIME, pointed out that the Tobin tax has been tried before.

"Once upon a time," he said, "Chile was the hottest destination for hot money, receiving more foreign indirect investment than it could handle, [and] 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 being by far the best place on earth to do financial transactions, but I am an economist, not a politician."

And David Blair, regulation partner at UK law firm Osborne Clarke, said the Commission lacked the "moral authority" to impose such a tax.

"Given the lack of transparency surrounding EU budgets, it seems questionable whether the EU Commission is an appropriate body to be redistributing wealth to European taxpayers," he said.

"In the event such taxes were, in fact, devoted to, say, bolstering EU institutional expansion or the preservation of the euro, taxpayers may feel the Commission's homage to Robin Hood lacks romantic substance." 

A number of industry associations have also voiced concerns over the proposal. The UK-based Investment Management Association (IMA) embraced the spirit of the tax, but expressed concern over specifics.

Julie Patterson, director at the IMA, said: "Pension funds could be hit twice by this tax - when the fund manager arranges a transaction on behalf of the fund and when the fund acquires or sells that asset. UCITS investors could be hit three times, as they may also be taxed when they buy units in the fund. As proposed, this would be a tax on savers, not banks."

And the Futures and Options Association (FOA) said it was "disappointed" by the draft proposal. It believes the tax would ultimately "increase the cost of business for non-financial firms and the cost of saving for individual investors".

"At the same time," it added, "the additional burden faced by the financial sector would create barriers to entry, reduce liquidity and increase the cost of risk management in direct opposition to the aims of the G20."

All member states in the EU's Council of Ministers will now discuss the proposal, which the Commission hopes to present at November's G20 Summit in Cannes.