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European Union financial transaction tax

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For the more general category of "financial transaction taxes", see Financial transaction tax.
EU Financial transaction tax
  Supporting EU countries
  Opposing EU countries
  Other Euro countries
  Other Non-Euro countries

The European Union financial transaction tax (EU FTT) is a proposal made by the European Commission to introduce a financial transaction tax (FTT) within some of the member states of the European Union by 2014. The tax would impact financial transactions between financial institutions charging 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts.

The proposed EU financial transaction tax would be separate from a bank levy, or a resolution levy, which some governments are also proposing to impose on banks to insure them against the costs of any future bailouts. The tax that could raise 57 billion Euros per year[1] remains controversial among EU member states.[2] In October 2012, after discussions failed to establish unanimous support for an EU-wide FTT, the European Commission proposed that the use of enhanced co-operation should be permitted to implement the tax in the states which wished to participate.[3][4] The proposal, supported by 11 EU member states, was approved in the European Parliament in December 2012.[5] The formal agreement on the details of the EU FTT still need to be decided upon and approved by the European Parliament.[6]

History

On June 28, 2010, the European Union's executive said it will study whether the European Union should go alone in imposing a tax on financial transactions after G20 leaders failed to agree on the issue. The following day the European Commission called for Tobin-style taxes on the EU's financial sector to generate direct revenue for the European Union. At the same time it suggested to reduce existing levies coming from the 27 member states.[7]

European Commission proposal

The building of the European Commission where the EU FTT proposal was drafted.

On September 28, 2011, president of the European Commission Jose Barroso officially presented a plan to create a new financial transactions tax "to make the financial sector pay its fair share",[8] pointing out that the financial sector received 4.6 trillion euros from EU member states during the crisis.[9] In December 2012 the European Commission's State Aid Scoreboard revealed a new figure saying the volume of national support to the financial sector between October 2008 and 31 December 2011 amounted to around 1.6 trillion euros (13 % of EU GDP), two-thirds of which came in the form of State guarantees on banks' wholesale funding.[10]

Given 10 EU member states already have a form of a financial transaction tax in place, the proposal would effectively introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU. According to the European Commission this would also "help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises".

The Commission proposal requires unanimity from the 27 Member States in order to pass.[11] France, Germany, Spain, Belgium, Finland spoke in favor of the EU proposal.[1] Austria and Spain are also known to support an EU FTT.[11] Nations that oppose the proposal include the United Kingdom, Sweden, the Czech Republic and Bulgaria.[1] Particularly the UK government has expressed strong views about the negative impact of the tax and is expected to use its power of veto to block the implementation of this proposal, unless the tax was to be introduced globally. The likelihood of a global FTT is low due to opposition from the United States.[11] As a way out, advocates of the FTT such as the finance ministers from Germany, Austria and Belgium have suggested that the tax could initially be implemented only within the 17-nation eurozone, which would exclude reluctant governments like the United Kingdom and Sweden.[12][13] If adopted, the EU FTT would come into effect on January 1, 2014.[8][14] In October 2012, after discussions failed to establish unanimous support for an EU-wide FTT, the European Commission proposed that the use of enhanced co-operation should be permitted to implement the tax in the states which wished to participate.[3][4] The proposal, supported by 11 EU member states, was approved in the European Parliament in December 2012.[5] The formal agreement on the details of the FTT still need to be decided upon and approved by the European Parliament.[6]

Scope

The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. It would cover 85% of the transactions between financial institutions (banks, investment firms, insurance companies, pension funds, hedge funds and others), but not affect citizens and businesses. House mortgages, bank loans to small and medium enterprises, contributions to insurance contracts, as well as spot currency exchange transactions and the raising of capital by enterprises or public bodies through the issuance of bonds and shares on the primary market would not be taxed, with the exception of trading bonds on secondary markets.[15]

Revenue Estimate for EU
Financial Transaction Tax[16]
Tax base Tax rate Revenue
estimate
(€ billion)
Securities:
Shares .1% 6.8
Bonds .1% 12.6
Derivatives:
Equity linked .01% 3.3
Interest rate linked .01% 29.6
Currency linked .01% 4.8
EU total 57.1

Following the "R plus I" (residence plus issuance) solution an institution would pay the tax rate appropriate to the country of its residence, regardless of the location of the actual trade.[17] In other words, the tax would cover all transactions that involve European firms, no matter whether these transactions take place within the EU or elsewhere in the world. If acting on behalf of a client, e.g., when acting as a broker, it would be able to pass on the tax to the client. Hence, it would be impossible for say French or German banks to avoid the tax by moving their transactions offshore.[18]

Tax rate and revenues

Naturally estimated revenues may vary considerably depending on the tax rate but also on the assumed effect of the tax on trading volumes. An official study by the European Commission suggests a flat 0.01% tax would raise between €16.4bn and €43.4bn per year, or 0.13% to 0.35% of GDP. If the tax rate is increased to 0.1%, total estimated revenues were between €73.3bn and €433.9bn, or 0.60% to 3.54% of GDP.[19]

The official proposal suggests a differentiated model, where shares and bonds are taxed at a rate of 0.1% and derivative contracts, at a rate of 0.01%. According to the European Commission this could approximately raise €57 billion every year.[19] Much of the revenue would go directly to member states. The United Kingdom e.g. would receive around €10bn (£8.4bn) in additional taxes.[20] The part of the tax that would be used as an EU own resource would be offset by reductions in national contributions.[20] EU member states may decide to increase their part of the revenues by taxing financial transactions at a higher rate.[8]

Evaluation and reception

For a general evaluation of financial transaction taxes, see Financial_transaction_tax § Evaluation.
European Commission

The European Commission itself expects the EU FTT to have the following impact on financial markets and the real economy:[19][21]

  • Up to a 90 per cent reduction in derivatives transactions (based on the Swedish experience).
  • Slightly negative or positive effect on economic growth depending on the design of the EU FTT.
    A long-run (20 year) reduction in gross domestic product in the EU by 0.53% if "mitigating effects" take hold, or up to 1.76% if they don't. In May 2012 the EU Commission corrected its analysis and now predicts a slightly smaller negative impact on economic growth of 0.3%, and even a positive impact of at least 0,1% or €15bn if the generated tax revenues are spent on growth enhancing public investments.[22] Algirdas Semeta, European Commissioner for taxation, customs, audit and anti-fraud argues that "if the projected €57bn (£47.7bn) per year is put towards consolidating national budgets, reducing other taxes or investing in public services and infrastructure, the direct economic effect of the FTT should be positive for growth and employment in Europe".[20]
  • An effective curb on automated high-frequency trading and highly leveraged derivatives
  • An increase in capital costs, which could be mitigated by excluding primary markets for bonds and shares from the tax
  • The real economy could be protected by ensuring the tax is levied only on secondary financial products, thus not affecting transactions such as salary payments, corporate and household loans

In its latest study from May 2012 the European Commission also dismissed the belief that financial institutions could avoid the tax by moving their transactions offshore, saying they could only do so by giving up all their European customers.[22]

External experts

In February 2012, the Committee on Economic and Monetary Affairs of the European Parliament discussed the European Commission proposal with financial experts. Avinash Persaud of Intelligence Capital, Sony Kapoor of Re-Define and Stephany Griffith-Jones of Colombia University have all welcomed the suggested financial transaction tax which, they argued would hit the right players, such as high frequency traders and intermediary financial players, and not the real economy,[23][24] and which could lead to a 0.25% increase in GDP.[25] Griffith Jones and Persaud estimate the positive impact on economic growth to amount to at least €30bn until 2050.[22] At the Committee meeting Stephany Griffith-Jones and Avinash Persaud presented a report which goes into more detail about this position.[26]

In this report, Griffith-Jones and Persaud base their claim that an FTT could lead to an 0.25% increase in GDP on the assumption that the FTT would "decrease the probability of crises by a mere 5%".[27] However, they do not believe that a Financial Transaction Tax on its own would prevent financial crises. The authors argue:

"the FTT would somewhat reduce systemic risk, and therefore the likelihood of future crises. We are clearly not arguing that on its own, the FTT would reduce the risk of crises, as prudent macroeconomic policies and effective financial regulation as well as supervision also have a major role to play in crisis prevention. However, by significantly reducing the level of noise trading in general and reducing (or eliminating) high frequency trading in particular, the FTT would make some contribution to the reduction of severe misalignments and hence the probability of violent adjustments. Moreover, in financial crises “gross” exposures matter more than the net ones, and financial transaction taxes will reduce the gap between the two. The growth costs of crises are massive. For example, Reinhart (2009) estimates that, from peak to trough, the average fall in per capita GDP, as result of major financial crises, was 9%. The Institute of Fiscal Studies (2011) has recently estimated that for the UK, when comparing the real median income household income in 2009-2010 with 2012-2013, the decline will be 7.4%. Of course for European countries directly hit by the sovereign debt crisis, like Greece, the decline of GDP and incomes will be far higher."[27]

In May 2012, member of the executive board of the European Central Bank Jörg Asmussen also spoke out in favor of an EU FTT, citing additional revenues and justice to be the main reasons.[22]

Former International Monetary Fund Chief Economist Kenneth Rogoff is critical of a FTT, saying "Europeans concluded that an FTT’s political advantages outweigh its economic flaws... there certainly is a case to be made that an FTT has so much gut-level popular appeal that politically powerful financial interests could not block it."[28] Similarly, Oxera,[29] the Sveriges Riksbank (Swedish National Bank)[30] and the Netherlands Bureau for Economic Policy Analysis[31] have all come out with detailed analysis and criticisms of the proposed EU FTT.

Public opinion

A Eurobarometer poll of more than 27,000 people published in January 2011 found that Europeans are strongly in favour of a financial transaction tax by a margin of 61 to 26 per cent. Of those, more than 80 per cent agree that if global agreement cannot be reached - a FTT should, initially, be implemented in just the EU. Support for a FTT, in the UK, is 65 per cent. Another survey published earlier by YouGov suggests that more than four out of five people in the UK, France, Germany, Spain and Italy think the financial sector has a responsibility to help repair the damage caused by the economic crisis. The poll also indicated strong support for a FTT among supporters of all the three main UK political parties.[32][33]

Position of member states

Requested participation in enhanced co-operation

The following 11 countries have requested to participate in the proposal of the European Commission to implement a FTT using enhanced co-operation:[5]

  •  Italy: In January 2012, new Italian prime minister Mario Monti said Rome had changed track and now backed the push for FTT, but he also warned against countries going it alone.[40]

Other supporting countries

  •  Netherlands: In October 2011, Dutch prime minister Mark Rutte said his cabinet supports a FTT but opposes an introduction in only a few countries.[43] Nevertheless, the country blocked the introduction of EU FTT in March 2012.[44] In October 2012 the new coalition government said it will adopt the proposed EU FTT provided it is not imposed on pension funds.[45]

Opposing countries

  •  Denmark: Denmark opposes a FTT if applied only in the European Union.[49]
  •  Luxembourg: In December 2011, Prime Minister of Luxembourg, Jean-Claude Juncker, backed the EU FTT, saying Europe can’t refrain from "the justice that needs to be delivered" out of consideration for London’s financial industry.[50] However, on 13 March 2012 the government officially opposed the EU FTT.[44]
  •  Malta: Malta opposes a FTT. The introduction of a blanket transaction tax by Europe would jeopardise the island's competitiveness in the financial services sector.[51]
  •  Sweden: Sweden opposes a FTT if applied only in the European Union.[1][44]
  •  United Kingdom: The British government supports a FTT only if implemented worldwide. In 2009, Adair Turner (chair) and Hector Sants (CEO) of the UK Financial Services Authority both supported the idea of new global taxes on financial transactions.[52][53][54] On the other hand, the Bank of England strongly opposes a FTT. Its governor Mervyn King dismissed the idea of a “Tobin tax” on 26 January 2010, saying: “Of all the components of radical reform, I think a Tobin tax is bottom of the list ... It’s not thought to be the answer to the 'Too Big to Fail' problem - there’s much more support for the idea of a US-type levy.”[55]

Other countries

  •  Cyprus: Cyprus has been reported to be "less positive" about the FTT.[46]
  •  Finland: Finland was originally among the nine EU member states pushing for an EU FTT,[56] however it was not among the states which requested the use enhanced cooperation.[57] The governing parties of Finland are divided over whether to join the EU FTT.[58]
  •  Hungary: Hungary is supportive of a FTT,[59] and on 16 July 2012 introduced a unilateral 0.1 percent FTT to be implemented in January 2013.[60]
  •  Latvia: Latvia has been reported to be "less positive" about the FTT.[46]
  •  Romania: Romania has stated that they would support an EU-wide FTT.[65]

See also

Related economic crises

References

  1. ^ a b c d e f Rebecca Christie and Jim Brunsden (November 8, 2011). "EU Transaction Tax Debate Highlights Euro-Area Disagreement". Bloomberg Businessweek. Retrieved 2011-11-22.
  2. ^ Reuters (June 28, 2010). "EU to study bank transaction tax after G20". Reuters. Retrieved 24 June 2010. {{cite web}}: |author= has generic name (help)
  3. ^ a b "Commission proposes green light for enhanced cooperation on financial transactions tax". European Commission. 2012-10-23. Retrieved 2012-12-27.
  4. ^ a b "11 eurozone states ready to launch financial transactions tax: EU tax commissioner". The Economic Times. 2012-10-09. Retrieved 2012-10-09.
  5. ^ a b c "Eleven EU countries get Parliament's all clear for a financial transaction tax". European Parliament. 2012-12-12. Retrieved 2012-12-27.
  6. ^ a b "Financial transaction tax: clearing the next hurdle". European Parliament. 2012-12-11. Retrieved 2012-12-27.
  7. ^ Ian Traynor (June 29, 2011). "EU calls for 'Tobin' tax in a move to raise direct revenue". The Guardian. Retrieved 2011-06-29.
  8. ^ a b c "Financial Transaction Tax: Making the financial sector pay its fair share". European Commission. September 28, 2011. Retrieved 22 November 2011.
  9. ^ Yaldaz Sadakova (March 12, 2012). "Debate on transaction tax heats up in Europe". MarketWatch. Retrieved 12 March 2012.
  10. ^ "State aid: crisis-related aid aside, Scoreboard shows continued trend towards less and better targeted aid". European Commission. December 21, 2012. Retrieved 22 December 2012.
  11. ^ a b c Noam Noked (2011-11-17, 2011). "EU Proposed Financial Transaction Tax – Fortune or Folly?". Retrieved 2011-11-22. {{cite web}}: Check date values in: |date= (help)
  12. ^ Rebecca Christie and Jim Brunsden (November 8, 2011). "EU Transaction Tax Debate Highlights Euro-Area Disagreement". Bloomberg Businessweek. Retrieved 22 November 2011.
  13. ^ Alessandro Torello and William Horobin (November 8, 2011). "ECOFIN:EU Finance Ministers Clash On Financial Transaction Tax". The Wall Street Journal. Retrieved 22 November 2011.
  14. ^ European Commission (September 28, 2011). "Commission proposes a financial transaction tax for Europe". European Commission. Retrieved 22 November 2011.
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  16. ^ http://ec.europa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/fact_sheet/revenue-estimates.pdf
  17. ^ Sieling, Carsten (May 2012): Financial Transaction Tax. Sensible, Feasible, Overdue. Friedrich-Ebert-Foundation Retrieved 2012-06-06
  18. ^ Avinash Persaud (2012-01-10). "Warum Rösler falsch liegt". Sueddeutsche. Retrieved 2012-01-10.
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  20. ^ a b c Harry Wilson (February 16, 2012). "Financial transaction tax would raise €10bn". Telegraph. Retrieved 3 March 2012. Cite error: The named reference "Semeta" was defined multiple times with different content (see the help page).
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  22. ^ a b c d Alexander Hagelüken (May 10, 2012). "Und sie funktioniert doch".
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  26. ^ Stephany Griffith-Jones and Avinash Persaud (February 2012). Financial Transactions Taxes (PDF) (Report).
  27. ^ a b Stephany Griffith-Jones and Avinash Persaud (February 2012). Financial Transactions Taxes, Page 6 (PDF) (Report).
  28. ^ Kenneth Rogoff (October 3, 2011). "The wrong tax for Europe". Reuters.
  29. ^ Oxera Consulting Report (December 2011). What would be the economic impact of the proposed financial transaction tax on the EU? (PDF) (Report).
  30. ^ Almenberg J and Wiberg M (February 2012). Taxing Financial Transactions (PDF) (Report).
  31. ^ Anthony J, Bijlsma M, Elbourne A, Lever M and Zwart G (January 2012). Financial Transaction Tax: Review and Assessment (PDF) (Report).{{cite report}}: CS1 maint: multiple names: authors list (link)
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  33. ^ EUROBAROMETER 74 - ECONOMIC GOVERNANCE IN THE EUROPEAN UNION, p. 13-14, European Commission, 12 January 2011
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  36. ^ Daniel Ben-Ami (March 25, 2002). "Tobin or not Tobin?". spiked.
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  39. ^ Tony Czuczka (December 10, 2010). "Merkel Says Germany Prefers Financial Markets Transaction Tax". Bloomberg.
  40. ^ "France financial transaction tax push hits resistance". Reuters. 2011-10-17. Retrieved 2012-01-06.
  41. ^ "Lithuania will not join supporters of EU financial transaction tax". 15min.lt. 2012-10-09. Retrieved 2012-10-27.
  42. ^ Bradley, Bryan (2012-12-14). "Lithuania to Join EU Financial-Transaction Tax, Butkevicius Says". Bloomberg. Retrieved 2012-12-27.
  43. ^ "Netherlands Supports Financial Transaction Tax, Rutte Says". Bloomberg. 2011-10-22. Retrieved 2012-01-07.
  44. ^ a b c Cerstin Gammelin (2012-03-13). (March 13, 2012) "Finanzmarktsteuer in der EU gescheitert - vorerst". Sueddeutsche. Retrieved 2012-03-13. {{cite news}}: Check |url= value (help)
  45. ^ Cahill, Ann (31 October 2012). "Dutch agree to EU Robin Hood tax". Irish Examiner. Retrieved 31 October 2012.
  46. ^ a b c d Huber, Nick (2012-02-01). "KPMG: EU governments wary of transaction tax". Accountancy Age. Retrieved 2012-10-27.
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  48. ^ Lopatka, Jan; Muller, Robert (2012-10-22). "Czech leftists see chance to take power, eye tax hikes". Reuters. Retrieved 2012-10-29.
  49. ^ Stanners, Peter (2012-02-09). "France and Germany pressure Denmark on finance tax". The Copenhagen Post. {{cite web}}: Text "2012-10-27" ignored (help)
  50. ^ "Juncker Says Euro Area May Introduce Financial Transaction Tax". Business Week. 2011-12-23. Retrieved 2012-01-07.
  51. ^ Karl Stagno-Navarra (May 24, 2012). "Gonzi insists with a 'no' to transaction tax, as EU leaders discuss Greece, Spain crisis". Maltatoday. Retrieved 2012-05-24.
  52. ^ Stephany Griffith-Jones (December 7, 2009). "Now let's tax transactions". London: The Guardian. Retrieved 2010-03-13.
  53. ^ Daniel Pimlott (2009-11-08). "Q & A on Tobin tax". The Financial Times. Retrieved 2009-12-11.
  54. ^ George Parker, Daniel Pimlott, Kate Burgess, Lina Saigol and Jim Pickard (August 28, 2009). "Turner relishes role on City front line". Financial Times. Retrieved 2009-12-31.{{cite web}}: CS1 maint: multiple names: authors list (link)
  55. ^ Emma Saunders (January 26, 2010). "Mervyn King: Radical reform is needed". Financial Times. Retrieved 2010-01-26.
  56. ^ "Nine countries push for financial transaction tax". EurActiv. 2012-12-08.
  57. ^ "Statement by Commissioner Šemeta on an EU Financial Transactions Tax – ECOFIN Council". European Commission. 2012-10-09. Retrieved 2012-10-09.
  58. ^ >"Finland steers clear of financial transaction tax". Yle. 2012-11-30. Retrieved 2012-12-27.
  59. ^ "The EU financial transactions tax: unprecedented steps" (PDF). PricewaterhouseCoopers. 2012-07. Retrieved 2012-10-27. {{cite web}}: Check date values in: |date= (help)
  60. ^ "Parliament approves transaction tax". The Budapest Times. 2012-07-17. Retrieved 2012-09-20.
  61. ^ "The financial transaction tax. Where are we now?" (PDF). PricewaterhouseCoopers. November 2011. Retrieved 2012-01-07.
  62. ^ "Government under fire for not signing up to financial transaction tax". Irish Examiner. 2012-12-14. Retrieved 2013-01-02.
  63. ^ "One country still needed to launch FTT". EurActiv. 2012-10-09. Retrieved 2012-010-27. {{cite web}}: Check date values in: |accessdate= (help)
  64. ^ Verhoosel, Verhoosel (2012-10-09). "Eleven eurozone states commit to enhanced cooperation". Europolitics. Retrieved 2012-10-27.
  65. ^ Blajan, Anne-Marie (2012-01-17). "Romania sustine introducerea taxei pe tranzactiile financiare, daca va exista un acord la nivelul UE" (in Romanian). Hotnews.ro. Retrieved 2012-10-27.
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