Today I heard that the EU is planning to continue with its plan to implement a financial/stock exchange transaction tax. The idea is to let the financial institutions pay for the costs that have been made for saving banks in the past and to pay for saving them in the future.

I find the whole idea utterly repulsive. Here’s why:

1. Unless it is actually put into a rescue fund, which in all likelihood won’t be the case, not even for a fraction of it, it will never cover for the costs of saving a bank or pension fund at the rate that crises are popping up. (with their associated bail outs) It won’t even cover a fraction of the costs incurred. Because the money will not actually be saved, the problems of saving banks which are too ‘big to fail’ (a bit of a misnomer if you ask me) won’t go away. Since politicians have an ever growing need for money to fund their socialist welfare programs, this money has already been spent at least twice, even before it is on the bank of the tax collection agencies.The costs of future bail outs will only drive up the tax rate, since politicians have no way to pay for them in the first place.
2. The tax will increase the need for financial institutions to make a profit on their investments. Since lower risk investments now have an even lower return on investment, they will prove ever less attractive to the institutions which need to have ever increasing profits in order to appease their shareholders. Therefore it introduces a pressure for the financial institutions to turn to high risk investments sooner than they did in the past, increasing the frequencies at which bail outs are needed.
3. Taxes are a limitation of freedom. I vehemently oppose any limitations on my economic freedom of movement. This tax is even worse than estate or inheritance taxes (a.k.a. the ‘death tax’) most European countries have. I find it hard to find a good rationale to base tax on, but on the other hand the state needs money to operate their devious scheme to control us all. This particular tax is one of the worst kinds of tax to me. Worse than income tax or sales tax. Income and sales taxes will apply equally to all. This tax is essentially another tax to tax those who have money, since those who are less well endowed will have no unallocated funds which they can use to trade with.

So that’s a lot of problems, eh?

I have some solutions as well. They’re not pretty, but I think they will work.

1. Separate the economic and the investment bits of the financial institutions. They did this in the US after the great depression, and it worked. It shouldn’t have been undone. Banking should be divided into three sectors:
   1. Checking account service providers.
   2. Savings and loan providers
   3. Companies which provide advice and trading services on the stock exchanges. This sector should include pension funds.

   There can’t be any financial ties between these sectors of the financial markets. people should be able to rely on their payment provider, while being aware of the risks the other two sectors carry with them.

2. Put an end to bail outs. Yes, people should be forced to reckon that they can loose all. Even if you put it on a savings account, it should not be covered by the state. It creates a false sense of security which in the end will come to haunt us though stifling taxes and impeded economic growth because of those taxes needed to pay for the bail outs.
3. End the loan addiction of businesses and households. A bit controversial, but very necessary. Basically we need to put an end to borrowing the profits of the future to fund the needs of today. It is the opposite way things ought to be. Time and again loans turn out to be a lot less solid in times of economic crisis. Banks haven’t priced this into their interest rates, and often they won’t have the buffers to shoulder the burden of the crisis. Loans should not be worth more than a third of the value of the underlying investment. Not being able to front entire business operations or asset acquirement on loans should fundamentally change the way businesses and households view loans. Yes, it will impede the abilities of businesses in the short term but at the same time it will make sure that loans are only a helping hand, not the sole means of getting things done.