Who pays a transaction tax?

One sometimes wonders how distanced politicians are from commerce, business and financial services.  There is the impression that they have a desire to punish financial institutions for actions that led to the global economic crash and to the current and ongoing global economic crisis – or at least for their actions that didn’t stop disaster happening.  But have politicians thought through the results of their actions?

One of my favourite German words is “konsequent”.  It’s used in the context of “one thing leading to another”, which also applies to “if you perform that action then this is what will logically follow and you have to be prepared for handling the results”.   In this case, the action will be taxing transactions and the consequence will be that those additional costs get passed on by financial institutions to their customers.  As always in commerce, the customer will pay.

But the tax bill that has to be paid may not stop there.  Changing the shape of markets through taxation can blow back in your face.  More companies need to raise capital to fund the growth of their businesses.  More national economies need to encourage small/medium companies to grow because they create jobs within those economies, and every country has an unemployment problem today.  Raising equity capital through IPOs hits a roadblock if a government then slaps an extra tax on equity transactions.  More people need to invest for their retirement and their children’s educations because governments have not had the money to fund those adequately for 20 years now.  Growth of those investments will depend on the costs of investing through capital markets.

In a service economy, end-customers pay for taxes levied on the infrastructure that delivers the service.  In the cases of a transaction tax, a whole economy will pay the tax bill.