Monday, November 12, 2012

Ten European Union Countries Consider Implementing a Controversial Tax on Financial Transactions

BBC: Financial Transaction Tax for 10 EU States
CNNMoney: Robin Hood Tax Gains Traction in Europe
Guardian: European Financial Transaction Tax Moves Step Closer
Reuters: EU Commission Backs 10 Countries' Transaction Tax Plan
Telegraph: Financial Transaction Tax Will 'Raise Billions', Says EU Commission
WSJ: Eleven European Countries Support Tax on Transactions

A controversial proposal by ten European Union (EU) member states to tax financial transactions within their borders could help those countries reduce their deficits, but it could also reduce their economic growth and drive their banking and investment businesses offshore toward untaxed financial centers. The proposal by ten EU members, including Germany, France, Italy, Spain, Austria, Belgium, Greece, Portugal, Slovakia, and Slovenia, would impose a 0.1% tax on the trades of stocks and bonds and a 0.01% tax on the trades of derivatives (a contract between two parties whose value depends on other underlying assets). Although the tax on each individual transaction is low, the plan could produce substantial amounts of revenue for the ten countries due to the significant number of transactions completed within their borders each year. France’s European Affairs Minister, Bernard Cazeneuve, said such a plan could generate more than €10 billion per year.

Proponents of the financial transaction tax argue that increased tax revenues could help the ten countries offset their costs associated with the European sovereign debt crisis, including the hundreds of billions of euros spent on bailing out struggling banks. The tax is particularly popular with taxpayers who feel as though they have suffered due to austerity measures (policies designed to reduce federal deficits through cuts in government services and/or increases in taxes) implemented to help fund the rescue of failed banks. According to Jose Manuel Barroso, the President of the European Commission, which functions as the EU’s executive branch, the tax is motivated by “fairness” and is designed to “ensure the costs of the crisis are shared by the financial sector instead of just shouldered by ordinary citizens.” To show support for the tax, members of grassroots organizations have started to dress up as Robin Hood (a fictional character who robbed the rich to help the poor) at public rallies that are reminiscent of the Occupy Wall Street events in the United States.

Opponents of the financial transaction tax, including the U.K., Sweden, the Netherlands, and many other EU members, believe the tax will slow economic growth in Europe, even if just confined to ten countries. A treasury official for the U.K. said the tax could negatively impact the EU’s “real economy” (manufacturing and service production). Many financial transactions are made through pension accounts held by manufacturing companies, and imposing financial transaction taxes on these manufacturers could lower their profitability, which in turn could lower their demand for new workers. Matthew Fell, the Director for Competitive Markets at the Confederation of British Industry, believes a tax on financial transactions could also slow economic growth by making it more expensive for businesses to raise money through the issuance of new debt and equity shares to investors. Businesses typically rely on these share sales to fund their expansions and growth.

Other opponents of the transaction tax, including banks and financial lobbyists, believe the tax will drive financial transactions out of the ten countries covered by the plan and into untaxed financial centers. The European Commission has downplayed this notion by arguing that the tax would apply to both parties in a transaction. For example, an American bank purchasing shares of a German investment fund would still need to pay the tax even if the trade was made in New York, an untaxed financial center. In responding to this argument, a deputy director for the Bank of Italy recently told the Italian parliament it would be easy for the bank to avoid paying the tax by simply moving its investment trading operations to another country. The Swedish government agreed with that assessment based on its experience attempting a similar tax in the 1980s, which ultimately resulted in the loss of transaction activity to other untaxed financial centers.

Although the financial transaction tax proposal would only take effect in ten countries, it still must be approved by a majority of all the EU nations and the European Parliament. Given the small minority of countries supporting this plan, its passage is far from certain. A similar proposal by the European Commission for an EU-wide transaction tax was soundly rejected by a wide majority of EU members last year. However, it is unclear if that majority will block the current proposal due to the economic boost it could provide to countries not enacting the tax. For example, the U.K. soundly rejected last year’s proposal for a transaction tax within its borders and questioned the wisdom of the current proposal, but said it would not block the current proposal’s passage. This support is likely due to the fact that London, as one of the top financial centers in the world, would benefit greatly from an influx of transaction activity seeking to avoid taxation.

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