European Union financial transaction tax
Encyclopedia
The European Union financial transaction tax (EU FTT) is a proposal made by the European Commission
to introduce a financial transaction tax
(FTT) within the 27 member states of the European Union
by 2014. The tax, if implemented, 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 remains controversial among EU member states.
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.
On September 28, 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". 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. The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts, at a rate of 0.01%. 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 new FTT could approximately raise €57 billion every year. These revenues would be shared between the EU and the member states. Part of the tax would be used as an EU own resource which would partly reduce national contributions. EU member states may decide to increase their part of the revenues by taxing financial transactions at a higher rate. If adopted the EU FTT will come into effect on 1st January 2014.
The Commission proposal requires unanimity from the 27 Member States in order to pass. 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. 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.
Former IMF Chief Economist Kenneth Rogoff remains 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." Rogoff also proposed an alternative perspective of the European Commission’s motives:
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 - an FTT should, initially, be implemented in just the EU. Support for an 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 an FTT among supporters of all the three main UK political parties.
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
to introduce a financial transaction tax
Financial transaction tax
A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
(FTT) within the 27 member states of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
by 2014. The tax, if implemented, would impact financial transactions between financial institutions charging 0.1% against the exchange of shares
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
and bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
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 remains controversial among EU member states.
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 taxesTobin tax
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
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.
European Commission proposal
Impact
An official study by the European Commission predicted the following impacts of a financial transaction tax levied at 0.1 per cent on stocks and bond trades, and 0.01 per cent on derivatives:- Revenue of between €16.4bn and €43.4bn, or 0.13% to 0.35% of GDP annually
- Up to a 90 per cent reduction in derivatives transactions (based on the Swedish experience)
- A long-run (20 year) reduction in gross domestic product in the EU by 0.5 per cent if "mitigating effects" take hold, or up to 1.76 per cent if they don't
- 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 on secondary financial products, thus not affecting transactions such as salary payments, corporate and household loans
Evaluation and reception
France, Germany, Spain, Belgium, Finland spoke in favor of the EU proposal. Austria and Spain are also known to support an EU FTT. Nations that oppose the proposal include the United Kingdom, Sweden, the Czech Republic and Bulgaria.The Commission proposal requires unanimity from the 27 Member States in order to pass. 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. 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.
Former IMF Chief Economist Kenneth Rogoff remains 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." Rogoff also proposed an alternative perspective of the European Commission’s motives:
"Perhaps officials noticed that virtually everything in Europe is already heavily taxed. So, rather than finance the European Union’s institutions through greater contributions from existing tax bases, they are seeking a consensus for new revenue sources. Or perhaps the Commission realizes that the FTT will be dead on arrival, owing to disputes within Europe, and simply wants to gain political capital from an enormous popular proposal."
Public opinion
A recent EurobarometerEurobarometer
Eurobarometer is a series of surveys regularly performed on behalf of the European Commission since 1973. It produces reports of public opinion of certain issues relating to the European Union across the member states...
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 - an FTT should, initially, be implemented in just the EU. Support for an FTT, in the UK, is 65 per cent. Another survey published earlier by YouGov
YouGov
YouGov, formerly known as PollingPoint in the United States, is an international internet-based market research firm launched in the UK in May 2000 by Stephan Shakespeare, now Chief Executive Officer, and Nadhim Zahawi...
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 an FTT among supporters of all the three main UK political parties.