When Taxes Make Things Worse

Even small dis-incentives can drive economic activity to die off or move.

While discussing the near inevitability of a tax on buying or selling shares in a company (separate for already existing taxes for gains from those transaction) the German newspaper Der Speigel cites the British experiment with exactly this sort of tax:

 

To see why, one must look no further than the meager successes of the British stock exchange tax, which only applies to share transactions, which constitute a tiny portion of all financial transactions. Since the introduction of the "Stamp Duty Reserve Tax" of 0.5 percent on the sale price in 1986, many share transactions are no longer being handled on the exchange. Instead, they are traded directly between two parties in the form of a so-called Contract for Difference (CFD).

These CFDs precisely reflect the changes in the price of a stock, but they are not subject to any stock exchange tax. Ironically, a tax is now ensuring that backroom deals are flourishing while the underlying securities are no longer being publicly traded on the exchange.

 

The intended effect of the tax never happened and simply drove revenue elsewhere.

 

In short the tax exceeded the tolerance of the Laffer curve for taxation. Traders were willing to pay taxes on realized gain (capital gains) from selling stock at a profit but a tax simply for the privilege of being allowed to buy and seel in the first place was a bridge too far.

 

Despite this, it seems like the EU will blindly lemming it's way into a transaction tax in a vain attempt to salvage its dying economy though oppressive taxation. They need that money to bail out contries who refuse to live within spitting distance of their means.

 

Good luck with that!

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