EU Backs A Tax On Financial Transactions

The financial crisis has given new legs to the idea of taxing financial transactions.

The European Parliament voted today to develop a new "transaction tax plan" that would "ensure that the financial industry pays for the damage caused by the financial crisis," according to this statement.

Paul Krugman, another backer of the idea, argued last fall that a small tax on financial transactions would discourage speculators (who trade frequently) without putting an undue burden on investors who buy for the long haul.

Other big-name liberal economists (think Joseph Stiglitz and Jeffery Sachs) have backed the tax as well.

Opponents argue that increasing the cost of financial transactions can make markets more volatile and distort prices. People can often find a way around the tax, by shifting to types of transactions that aren't targeted by the levy. And if a transaction tax is put in place in some countries but not others, people will simply move their transactions to avoid the tax. Sweden tried a tax on stock and bond trades, but dumped it after Swedish investors largely started doing their trading abroad, the Economist points out.

Key political leaders are split.

German Chancellor Angela Merkel, French President Nicolas Sarkozy and British Prime Minister Gordon Brown have all voiced their support.

But Timothy Geithner rejected the idea at the G20 meeting last fall. Canada has opposed it as well.

The subject will be up for discussion again at the G20 meeting in April, and Brown is still pushing the idea.

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