Eurozone finance ministers proposed to allow for taxation of financial transactions, attempting to raise billions in taxes, while curbing harmful speculation. However, based on the reality of the situation, it will be a counterproductive action.

In implementing Tobin Tax for the Eurozone does not require much imagination to figure out where a great deal of financial activity will be redirected. As London is Europe’s leading financial center, there is already a huge gap in the plan to raise billions while lowering speculation with a Tobin Tax. In fact, the United Kingdom, Luxembourg, the Czech Republic, and Malta are already refusing to participate.

Although, most of the trading is done by institutional investors, it is the individual investor who will pay for it. Why? Because the greatest pools of capital are retirement savings holdings for teachers, firemen, police officers, government workers and similar category of individual investors. These are the ones who make up a mutual fund or a pension fund. These are also the investors who finance hedge funds that often come under attack by regulators.

So, it seems that it will be individual investors’ money being taxed and they will be paying higher taxes.

A tax on financial transactions will also be very difficult to enforce and administer. There are multinational organizations involved in almost all major financial transactions. For example, if a British firm is taking over a French company while being advised by a German financial house, who is responsible for the tariff? Equally important, how will the taxes be distributed?

Moreover, as governments and others shift from defined benefit retirement plans to defined contribution retirement plans to relieve pressures on budgets from soaring pension costs, Tobin Tax will make a defined benefit retirement less attractive due to the higher costs for investing in the securities markets. This could become yet another labor-management issue to create even more difficulties for economies in the Eurozone.

Finally, more trades in a securities market, the more liquidity that is provided. It is liquidity, after all, that prevents a financial market from imploding. And higher taxes on financial taxes will require additional capital to pay the new tariff instead of providing much needed funds for investing.

Government efforts should be focused on reductions in spending that lead to job creation, not higher taxes that would only create damage on economic activity in the private sector.