A European financial transaction tax?

Research Highlight 2012

The EU Commission’s Proposal for a Financial Transaction Tax

The European Commission’s proposal for a Financial Transaction Tax (FTT) has been one of the most controversial political issues in the EU over the past year. The proposal has the full backing of the EU Parliament, and is the subject of vocal and widespread campaigns by interest groups, although EU Member States are divided on the issue.

The CBT issued a policy briefing on the proposal just after it was published in September 2011, which was extended into a longer article in the British Tax Review. Our work questions each of the proposal’s four objectives as set out by the European Commission. The first objective is to raise revenue from the financial sector to recover the costs of the financial crisis, to compensate for the “undertaxation” of the financial sector due to the VAT exemption for financial services, and to create a new revenue stream for the EU. All of these reasons are unconvincing; the link with the costs of the financial crisis is tenuous; the extent of under-taxation due to the VAT exemption is controversial, with mixed evidence, and there is no  apparent reason why the EU should be financed by a financial sector tax. In any case, if the aim is simply to raise more revenue, then other, more efficient, taxes would be preferable. 

The second objective is to create disincentives for transactions that do not enhance the efficiency of financial markets. The Commission’s target is short-term trading, particularly high- frequency trading (HFT). However, as the Commission itself has explained, the “existing evidence is inconclusive about the impact of HFT on market efficiency.” In any event, targeted regulation appears to be a better option to address such concerns.

The third objective is to avoid a fragmentation of the internal market given the increasing number of national financial taxes being introduced. But these new taxes are not FTTs, and so this objective is not well grounded. The final objective is to pave the way towards a global introduction of the tax. But there is little evidence that the unilateral introduction of the tax  in the EU will induce other countries to follow suit.

John Vella