Commission outlines Financial Transaction Tax proposal

Scofflaw

The Commission's Financial Transaction Tax Proposal is out:

Financial Transaction Tax: Making the financial sector pay its fair share

Brussels, 28 September 2011 – Today the Commission presented a proposal for a financial transaction tax in the 27 Member States of the European Union.

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%. This could approximately raise €57 billion every year. The Commission has proposed that the tax should come into effect from 1st January 2014.

The Commission has decided to propose a new tax on financial transactions for three reasons.

First, to ensure that the financial sector makes a fair contribution at a time of fiscal consolidation in the Member States. The financial sector played a role in the origins of the economic crisis. Governments and European citizens at large have borne the cost of massive taxpayer-funded bailouts to support the financial sector. Furthermore, the sector is currently under-taxed by comparison to other sectors. The proposal would generate significant additional tax revenue from the financial sector to contribute to public finances.

Second, a coordinated framework at EU level would help to strengthen the EU single market. Today, 10 Member States have a form of a financial transaction tax in place. The proposal would introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU.. This will help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises. The financial transaction tax at EU level would strengthen the EU's position to promote common rules for the introduction of such a tax at global level, notably through the G20.

The revenues of the tax 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. Member States might decide to increase the part of the revenues by taxing financial transactions at a higher rate.

Algirdas Å emeta, Commissioner for Taxation, Customs, Anti-fraud and Audit, said: "With this proposal the European Union becomes a forerunner in the global implementation of a financial transaction tax. Our project is sound and workable. I have no doubt this tax can deliver what EU citizens expect; a fair contribution from the financial sector. I am confident that our partners in the G20 will see their interest in following this path."

Next steps
The proposal will be discussed by all Member States in the EU's Council of Ministers and the Commission will present it to the G20 Summit in November.

See also MEMO/11/640
For the full text of the proposal and the study analysing different tax instruments, see:
http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index_en.htm

Background
As a result of the crisis, public debt in all 27 EU Member States jumped from below 60% of GDP in 2007 to 80% for the years to come. The financial sector has received substantial financial support from governments. EU Member States have committed € 4.6 trillion to bail out the financial sector during the crisis. In addition, the financial sector has benefited from low taxes in recent years. The financial sector enjoys a tax advantage of approximately €18 billion per year because of VAT exemption on financial services. A new tax on the financial sector would ensure that financial institutions contribute to the cost of economic recovery and discourage risky and unproductive trading.

The financial transaction tax aims at taxing the 85% of financial transactions that take place between financial institutions. Citizens and businesses would not be taxed. House mortgages, bank loans, insurance contracts and other normal financial activities carried out by individuals or small businesses fall outside the scope of the proposal.

The Commission has explored the idea of taxing the financial sector at EU level for several months now. On 29 June 2011, the Commission announced in the context of the multiannual financial framework that it would propose to set up a financial transaction tax as an own resource for the EU budget (IP/11/799, MEMO/11/468).

The decision followed an analysis of different tax instruments to make the financial sector contribute to the recovery of the EU economy.

In parallel, the Commission has explored ways to introduce a financial transaction tax at global level since 2009 with its international partners in the G20 (Pittsburgh, Toronto).

Next steps
The proposal will be discussed by all Member States in the EU's Council of Ministers and the Commission will present it to the G20 Summit in November.

See also MEMO/11/640
For the full text of the proposal and the study analysing different tax instruments, see:
http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index_en.htm

The arguments for having such a tax, and at the European level, are:

The public sector, and thus the tax payer, supported the financial sector during the financial crisis. The financial sector should now bear its fair share for the costs through a tax on financial transactions

The crisis has shown that some high risk activities of the financial sector should be discouraged as in some cases they may cause damage to the real economy. This mainly holds for certain highly-leveraged derivatives and some high-frequency automated trading activities.

Already some EU countries have independently introduced or started to put in place national tax instruments to this end. A coordinated framework at EU level would avoid national fragmentation and distortions of the EU Single Market: double taxation, non taxation, cumulative effects, and harmful tax competition.

A financial transaction tax should be harmonised at EU level because uncoordinated national policies could harm the functioning of the Single Market. It would also reduce the risk of relocations from one financial market to another.

The Directive will only harmonise to the extent necessary and fix the minimum rates which will be applicable in all Member States.

Financial markets and institutions are globally organised therefore, the adoption of a FTT at EU level is only a pragmatic first step. Discussions about a global FTT are currently taking place at the levels of the G20 and the United Nations. The Commission strongly supports the introduction of a global FTT on the basis of its own proposal.

There's a "citizen's summary" here: http://ec.europa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/ftt_citizens_summary_en.pdf

cordially,
Scofflaw

Debtocracy

Hopefully this will be the start of a gradual disincentivization of virtual financial trading. Besides creating volatility in the markets, financial trading contributes nothing to society, but simply shifts digital money back and forth between computers. The only difference between financial trading and online gambling is that the latter has some ethical standards.

Ideally you want a situation where the money caught up in the virtual economy gets transferred to the real economy. Financial traders should be investing directly in companies, in infrastructural projects, not gambling on whether a digital construct goes up or down. Betting in the real economy will present as many risks as betting in the virtual economy, but at least something useful to society gets carried out in the process. As the real economy continues to starve, this is not the time for the financial industry to be using money to play computer games.