Brussels, 14/06/2011 (Agence Europe) - A financial transaction tax (FTT) would be a good idea, as it would allow the EU substantial revenue while forcing the financial sector to contribute to covering the economic and social costs of the crisis. It would come at the right time, with the national budgets being cut and it being easier to bring in. This new system would, however, bring with it many problems and also costs, particularly for the banks, which could pass these on to consumers over the longer term. Nor is it certain that the tax would help to stabilise markets by making them less volatile.
These are the principal conclusions of the seminar held in Brussels on 14 June under the aegis of the Institute for Development Studies (IDS) of the University of Sussex, the NGO Confederation for relief and development Concord, Oxfam International and the international alliance of Catholic development agencies, CIDSE. The timing of the event was crucial, coming a few days after the vote on the Garriga-Polledo report at the EP in favour of creating an FTT at European level (see EUROPE 10394), with the President of the European Commission recently having taken position to this effect and a week ahead of the Ecofin Council, which will deal with the issue.
The discussions, which were introduced by speeches by Anni Podimata (S&D, Greece), rapporteur of the EP on innovative financing at global and European level, Philip Kermonde, director of DG Taxation and Customs Union, and Neil McCulloch, economist and researcher at IDS, brought together a panel of experts who focused on various aspects of the dossier. The common thread for all of the work was a report by Grazia Pacillo and the above-mentioned Neil McCulloch highlighting the arguments for and against bringing in a tax of this kind and trying to answer the following questions:
What would be the impact of the tax on market volatility? Certain theoretical models suggest that an FTT could reduce volatility and stabilise the markets, but empirical investigations, notably in countries (e.g. Sweden) which have brought in this kind of tax at national level, show that higher transaction costs are, in fact, associated with greater volatility. The greatest of care must be taken in defining the tax (tax base, rate). If the tax is excessive or too widespread, this could cause a contraction of operations and cash resources on the markets, bringing in higher levels of volatility. (Ed: this conclusion was confirmed by Mario Draghi, candidate for the top job at the ECB, at his hearing this week before the committee on economic and financial affairs of the EP).
Is the FTT practical? It is now easier for states unilaterally to bring in various kinds of FTT (for example, a tax on monetary transactions) due to changes made in the way transactions are governed, but the details for collecting the tax (at national level or at market level) remain broadly open. Another problem is how these taxes can be implemented effectively, due to: - the option available to market players to substitute taxable instruments for non-taxable instruments; - the problem of establishing appropriate rates for the various financial instruments, due to their variety and disparities between the costs of the transactions on the various markets; - the option open to the market players to transfer their activities to places where they will not be taxable; - the problem, which was also confirmed by Draghi, of distinguishing between short- and long-term operations and targeting speculative behaviour. In order to make the tax effective and to make it pay, all of these factors must be taken into account when establishing a sufficient raft of instruments to be taxed at appropriate rates, in order not to make the cost of transactions excessive or encourage the relocation of activities.
How much would an FTT bring in? Estimates vary, depending on which instruments are taxed and which rates apply. A tax of 0.005% applied solely to the currency market would bring in around $26 billion a year internationally. This figure would rise to $159 billion if transactions on bonds and derivative products were also included, and to $495 billion if instruments negotiated outside stock exchanges (over-the-counter, OTC) were included. However, it would be far more problematic to apply the tax to derivatives and OTC, partly due to the costs brought about by controls and the risks of operator migration. It would, however, have the considerable advantage of limiting speculation.
Who would pay? The study shows that initially, the tax would affect market operators, particularly those carrying out short-term monetary transactions. Over the longer term, however, a significant proportion of the tax could be passed on to consumers.
Lastly, one final problem which has not yet been resolved at EU level is that of allocating the product of the tax: should the revenue collected be paid to the member states, or constitute a resource of the Community budget? The Commission's impact study on all of these issues is keenly awaited. (F.G./transl.fl)