Surrealistic tax-ideas speed up in EU

There is an economic test with a market with only 2 companies. They both sell their product at $100 per piece. Every company has a 50% market share. At one moment one of the companies reduces the price to $99 per piece. The other keeps its price at $100. What do you think happens? May be the second company is losing 1% of its market share and becomes 49%, while the other gets to 51%? Absolutely no. In fact the second company is losing all its market share, because all the customers are moving to the first, thanks to 1% lower price. That is the real economy.

So now let's go to Europe and the new ideas of implementing the so called tax on financial transactions. The last concept considered in European Commission is to make all companies having business in countries that have this tax, pay it. This means that even a company is registered out of tax-area (for instance in London) it will have to pay, if having deals in countries that have the tax. This is an attempt to limit the options of avoiding the tax.

What do you think will be the result of all this? May be some of the investors will run away from the tax-countries? Theoretically yes. But in practice the result will be just like in the instance from the first paragraph of this article.

11 of all 27 EU countries intend to implement the tax and expect from it about 35 billion Euros annual income. But they miss the risk of calculating the tax on zero base. I.e. they will get 0 billion Euros annual income.

It is deeply doubtful the turnover of financial markets will remain with the old size, after implementing the tax. So it is deeply doubtful the income will be the calculated one. In fact it will be much less. And even if it does not reach the 0 value the losses in any case will be serious.

While looking at taxes the bureaucrats miss the bigger picture. What are the financial transactions? What is their purpose? Why people are doing such transactions?

The answer of this question is very important. These transactions are a part of doing business and building up the economy. They are not just a game of speculators. The overall investment process and the distribution of capital among industries goes through financial transactions. Any tax in this area leads to disturbing signals in economy and making not optimal decisions. For instance an investment in Germany may be more profitable than an investment in UK, but due to German taxing the money to go to UK.

The 11 implementing the tax countries are risking a serious outflow of capital that may cost them much more than the hypothetical income of taxing the rest of the capital. The loss in value of missing investments and suppressed growth may be greater that the tax-income. There is some bad experience in this in some countries that already tried the financial transactions tax.

And finally for answering the possible question if I am overestimating the possible loss, let's give an example more. In an attempt to collect more money the US government issued a regulation on income and bank accounts of American citizens abroad. And there are sanctions on banks that do not cooperate. They risk fines on their business in USA. So the result of this repression was unexpected (for bureaucrats) - it became harder, and sometimes even impossible for an American citizen to open a bank account abroad. Banks simply chase out the American customers. And this makes problems to common Americans that have a business abroad. Who could imagine that American citizenship will become a problem on a planet where it is one of most desired statutes...
Obviously it happens...

The market is rational. And this is the same with the surrealistic taxation ideas of EU...

Feb 14th 2013

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