January 02, 2012
An NYT article on changes in governance rules in the European Union (EU) referred to the United Kingdom’s opposition to a financial speculation tax supported by other members of the EU. The article noted that the UK cited a study done by the European Commission that found such a tax could lower GDP by 1.76 percent.
It is worth noting that this projected drop in GDP was derived from a model was intended as a work in progress, not a well developed forecasting technique. This model did not incorporate potentially beneficial effects of a tax such as diverting resources from the financial sector to more productive sectors of the economy.
The model also has several implausible implications. For example, it implies that much of the productivity growth in the last three decades was attributable to the decline in transactions costs in financial markets. This is not a factor in standard growth models, nor do any official projections assume a slowdown in productivity growth based on the fact that it will be impossible for transactions costs to decline as much in the future as they did in the past (because they are so close to zero already). The model also implies that the UK could raise its GDP by almost 10 percent if it eliminated the 0.5 percent tax that it imposes on stock trades.
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