For many years Europe has struggled to introduce financial transaction tax (also known as FTT and Tobin tax). In 1984 when Sweden first installed FTT, it set off a chain reaction of events which effectively strangled its domestic financial markets until the tax was eliminated, six damaging years later.
The introduction of an FTT has recently been added to Hungary’s policy makers’ agenda. Zsolt Kalocsai, the Managing Partner of RSM DTM Hungary, RSM's Hungarian member firm, believes that we should look at the case of when Sweden brought in an FTT back in the 1980’s…
The key development was in 1986 when Sweden erroneously doubled the tax, driving 60 percent of the turnover of its 11 most actively traded shares to move to London. By the 1990's 50 percent of the Swedish stock exchange's former turnover was traded in London, and most dramatic of all – futures trading fell by 95% and bond trading fell by 85%.
Key elements: 1. Foreign investors reacted to the tax by moving their trading offshore
2. Domestic investors reacted by reducing the number of their equity trades
3. Tax revenues from FTT were almost entirely absorbed by the drastic reduction of the personal income tax on the capital gain of transactions
4. Markets hated the FTT - The Stockholm stock exchange dropped by almost 5.5 percent and later, in response to the news of the increase of tax, shares fell a further 1 percent.
5. FTTs are not guaranteed to earn - the actual revenue from FTT for government securities in Sweden was a dismal 4 percent of the predicted tax revenue.
Sweden’s misadventure teaches us that the introduction of an FTT can clearly have dramatic implications for financial markets, with the potential to do long term damage.
These are important lessons and highly relevant today. The risks of the FTT are clear. But would these risks be mitigated by the introduction of regional or global FTTs? Probably yes, but the likelihood of such happening is remote.
If applied to Europe, transactions would (by their nature) move to the American continent or to Asian financial markets immediately.
So it is no coincidence that many EU member states are clearly against the introduction of FTT including the United Kingdom, Italy and, no surprise, Sweden.
Introducing an FTT is not a simple decision for policymakers as the historical evidence points to the risks almost certainly outweighing the benefits.