Two weeks ago the press reported an apparent breakdown in the discussions between governments in the EU Council, and a subsequent large-scale watering down of the financial transaction tax proposals.
I believe these reports are premature and there is no consensus on watering down. But the reports reflect fairly the difficulty of achieving political consensus on the form and scope of the FTT as well as on its objectives.
The FTT, as proposed, would be levied at 0.1 per cent on all transactions in securities and at 0.01 per cent on all transactions in derivatives, where one counterparty is a financial institution located in the FTT zone, or where the financial instrument is issued in the FTT zone.
Over the last few weeks and months we have seen a proliferation of papers and reports outlining the damaging effects of the FTT proposals.
It has been argued that the proposals, if implemented, would paralyse the repo and stock lending markets, would render some transactions in derivatives uneconomical and would increase the cost of other transactions, based on the cumulative application of the tax (known as the ‘cascading effect’, which describes how the tax is levied at each stage of the settlement of any transaction).
Reports have argued that this will lead to an increase in businesses’ cost of capital and the cost of issuing government debt, and, ultimately, a decrease in GDP growth and the ability of countries to claw out of recession.
The financial sector has been accused of acting in its own self-interest, but those that level this accusation often fail to understand the impact on financial markets and their use to society at large. Very few argue that the objective of making the financial sector pay the cost of the financial crisis is wrong in principle. But the FTT proposals fail to meet that objective.
In its current form, the tax would largely not be a tax on banks and financial institutions. It would be a tax on users of financial products – directly levied on funds and pension funds, the savings of ordinary EU citizens.
The European Fund and Asset Management Association issued an impact analysis in March calculating a cost of €13bn per year on Ucits funds. A higher impact might still be expected on funded pension schemes.
More recently, German blue-chip companies, including Bayer and Siemens, have publicly stated that they face tens of millions of euros in costs from the FTT.
The apparent political deadlock reflects some quite detailed analysis and lobbying on the damaging effects of the tax. Evidence from the financial sector and elsewhere has helped persuade governments that the current proposals are not a good idea.
There are other ways of taxing the financial sector, such as the UK’s bank levy and the German equivalent. These could serve as models should the EU persevere in its efforts to harmonise taxation of the financial sector.
Jorge Morley-Smith is head of tax at the Investment Management Association