Aversion Therapy 101; Or, the Bourbons Ride Again

The French discover that in an era when you don’t have a captive tax base, you can’t just start ratcheting up folks’ tax burdens.  If they can leave, they will.  Once upon a time the French kings, like kings everywhere, plundered the Jews until there was nothing left to plunder, at which time they kicked them out (not omitting to kill several thousand on the way out the door, of course, just because, dontcha know).  Today’s functional equivalent of the Jews aren’t quite so constrained in their movements; they can get out the door first.

Nowadays when people and capital are ever-more detached from any particular situs, if you start doing stoopid things like enacting taxes on financial transactions, well, they’ll just up and move their dealings elsewhere.  Or they’ll shift into transactions that aren’t so heavily taxed.

This is news to the French government.

Without waiting for its EU neighbors, France enacted a tax on financial transactions in certain securities of firms having a net worth of € 1 billion as of 1 July 2012.  If a security subject to the tax is traded on a French exchange, the purchaser (not the seller) owes the tax.  The tax is not levied on all financial transactions, nor among the securities of all issuers.  Some securities traded on the Paris exchange are subject to the tax (mostly securities of the larger firms), and some issuers (mostly smaller firms) are not subject to the tax, and some kinds of securities (such as derivatives) are not subject to the tax.  In other words, the French, bless their little Gallic hearts, have created a laboratory experiment.  If you have two securities identical in all material respects (say, one share each of common stock in two firms in the same industry, with similar earnings per share, similar debt loads, similar cash flows, etc.) except that one is issued by an entity subject to a specific tax levied on transactions in that security and the other not, which security would you expect to see traded more frequently?  Or let’s say that you have the same issuer, but of two distinct securities, one of which (say, a share of common stock) is subject to the tax, and the other of which (say, a derivative) is not.  Again:  Which gets traded more frequently?

The results are in:  In August the French cranked up their already-introduced tax.  Granted, it’s only 0.2% of the value of the transaction, but that percent of a sufficiently large number is still a pretty damned big number.  So someone has compared the May-July trading data for securities traded on the Paris exchange versus the same securities from August-December.  What they found is that 99 securities subject to the tax experienced a 18% drop in trading volume, while 93 securities not subject to the tax saw an 16% growth in volume.  Hmmm.  They also noted that investors seem to be moving as well into securities that are exempt from the tax, such as derivatives.

The Paris exchange’s competitors (the DAX, among others) also experienced volume loss, but by less than ten percent.  So while pegging a specific number to the shift is difficult, it’s pretty clear that the increase in the tax is in fact moving would be “donors” (for quite a few years I was on our local humane society’s board of directors, and during that time I got familiar with the fact that most veterinary practices keep one or more “donor” animals around the premises, for the specific purpose of having blood drawn from them; the same logic applies here) from taxed to untaxed issuers, and from taxed securities to untaxed securities. 

Of the two trends the more worrisome, I’d suggest, is the shift to derivatives and other exempt issues, rather than that from larger to smaller issuers.  The reason that those securities are untaxed is that their actual value is so hard to determine because . . . because they’re so risky.  And their actual value to the purchaser is contingent upon events that generally have not occurred as of the date of purchase.  Mind you, one of the (at least stated) objectives of the Dodd-Frank financial abortion bill (or whatever its actual name is) was to get some sort of regulatory handle on derivatives precisely because they were so risky that not even super-savvy financial institutions, with guys dragging around sheaves of Ph.D.s in mathematics and statistics, knew how accurately to price them or to weigh their risks.  Thus, when they started to blow up back in 2008, they really blew up because all these suddenly-matured risks were theretofore unknown to the holders.  And so forth.  And now the French have adopted a tax policy which encourages more large investors to move their activity into precisely those issues.

Explain to me again how this is a good idea, as a policy matter?

And oh by the way:  The French had expected to raise € 1.6 billion from this little soak-the-rich scheme.  Looks like something more on the line of € 300 million is going to be the net.  That’s 80% less than expected.  Folks, you know what happens to a chief executive officer in the private sector when one of his signature initiatives falls flat by 80%?  He tends to become “the former CEO of BLANK.”

Predictably, the chorus is not questioning whether it’s a dopey idea to have such a tax in the first place.  No, the debate is around the proposition that it must be introduced on a pan-European basis.  Don’t these drooling savants have any idea that money is fungible, and that the same people who’ve bolted the French exchanges for the German or British will bail out for the NYSE, or Chicago, or Tokyo?  If you can’t keep your Jews in place, you can’t bleed them.  And the latter-day Jews aren’t going to sit still and take it; they don’t have to.  The socialists just don’t seem to get it that snuffing kulaks these days is like chasing gobs not just of mercury, but gobs of cyber- and synthetic-mercury around a plate that is spinning phenomenally fast in all three axes.  Stalin, their hero, could send his troikas of Chekisty into the countryside and liquidate them by the hundred.  They couldn’t move fast enough to avoid him.  Times have changed since the 1930s.

All of which goes to show that it wasn’t just the Bourbons who neither learned nor forgot anything.

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