The long march towards a Financial Transaction Tax begins
In a Communication dated 28 September, the European Commission proposed the introduction of a Financial Transaction Tax (FTT). According to the Commission’s rationale, the FTT would represent a fair contribution by the financial sector to defraying the costs of the present crisis, the sector having been the recipient of massive taxpayer-funded bailouts as the crisis began.
Most financial services are exempt from value added taxation, as calculating in detail the taxable basis – the value added – is not a straightforward matter. Until now, this has had the effect of conferring a privileged tax status on banks and other financial institutions such as insurance companies and hedge funds. The Commission’s proposal is intended to redress the balance here. In order to avoid distortion of competition in the internal market, it is considered necessary to levy a tax which will be harmonised at the European level. A recent Eurobarometer survey shows that there is broad public support for such a tax: 65% of European citizens have stated that they are in favour of a tax on financial transactions.
A worldwide tax on foreign exchange transactions was originally proposed by American economist James Tobin in 1972. Since then, however, mainly because of the numerous technical problems associated with calculating and levying such a tax, the idea had always been rejected as unworkable. Today, however, in the wake of the financial and debt crisis, a stronger tax burden on the financial sector is being demanded by many political parties and civil-society groups, including groups with a Christian background. In the spring, the European Commission was still hesitating between a financial transactions tax and a contribution linked to the level of profits of banks. The turning point came in August, when Germany and France made known their preference for a tax on financial transactions. In addition, shortly before this, the Commission had officially proposed the creation of a privately financed European bank rescue fund.
In its September proposal, the Commission envisages that the new tax should cover all financial transactions, regardless of whether they are conducted on stock exchanges or by informal and direct means. The tax would be due in the Member State in which a participating financial institution is deemed to be located and as long as at least one of the parties is an EU resident. The Commission proposes that the financial transactions of private households and small and medium-sized enterprises should be exempt from the tax. These would include, for example, mortgage loans and insurance premiums, as well as loans for financing investment projects. The proposed rates of taxation are 0.1% for the exchange of shares and bonds and 0.01% for derivatives. It is estimated that this could raise a total of almost €60 billion annually.
In addition, the Commission has made it clear that, in the long term, it would be necessary for this tax to be levied throughout the world. However, at the most recent G20 summit in Nice, a number of key nations, including the USA, the UK and China, expressed their opposition to this tax.
The question of the use to which the proceeds of the new tax will be put is also a controversial and politically sensitive issue. The Commission suggests using the proceeds to finance part of the EU budget. On the margins of the G20 summit, French President Nicolas Sarkozy spoke in favour of using a portion of the proceeds for development aid and worldwide climate protection. Incidentally, the Pontifical Council for Justice and Peace (Justitia et Pax) has argued along the same lines in its recently published Note on reforming the international financial and monetary systems.
However, after the initial consultations in the Council of Ministers on 8 November, it is more than questionable whether the tax can actually come into force in the EU in 2014, as proposed. Some Member States have signalled their fundamental opposition. These include Sweden, which, like the USA, favours a bank contribution, and above all the UK, where the City of London alone accounts for 10% of GNP. For this reason, it was proposed by German Finance Minister Wolfgang Schäuble and others that, on the legally possible basis of “strengthened cooperation”, the FTT should only be introduced for the countries in the Eurozone. Nevertheless, the road to its realisation is still likely to be a very long one, even if the original idea from 40 years ago has now become an official proposal of the European Commission.
Translated from the original German