HK a poor lead for Sarkozy to follow on transaction taxes

French President Nicolas Sarkozy is out to hit financiers where it hurts most: in their pockets. At the weekend he said France would unilaterally impose a 0.1 per cent tax on equity and derivatives transactions from August.

Sarkozy is hoping other European countries will follow suit, leading to the introduction of a European-wide tax on financial market transactions designed to deter speculation and repair government finances. 'What we want to do is provoke a shock, to set an example,' he said.

In Hong Kong, bankers and officials are rubbing their hands at the prospect, believing the proposed levy will drive business to tax-free financial centres outside Europe.

That's a huge paradox, because Hong Kong provides one of the few pieces of evidence that a financial transactions tax may actually be effective at reducing market volatility and raising revenue.

Also known as a Tobin tax, after the late US economist James Tobin, or a Robin Hood tax, after the English folk hero who stole from the rich to give to the poor, a tax on financial transactions is hardly a new idea. British economist John Maynard Keynes proposed one in the 1930s on the grounds that it would throw sand in the wheels of international markets, helping to prevent the formation of bubbles.

Tobin himself suggested a tax on foreign exchange deals in the 1970s as a means to reduce currency volatility. And in the 1990s the United Nations came up with a similar proposition, intended to fund development projects in poor countries.