The European Union Financial Transaction Tax

The economic crisis of 2007-2009 highlighted the dire consequences of having a very powerful financial sector that is mostly unregulated. Although some anticipated an economic slowdown; its overall impact, and global reach was unforeseen by most (Bloomfield 2009, p. 2275). The continued integration of global commerce is mostly regulated using localized treaties between economies, and there is a lack of overarching guidelines applicable for all trading parties. This was a flaw that was made apparent during the last major global economic slowdown, and many policy makers have become actively involved in seeking solutions.

The European Union financial transaction tax (EU FTT) is the reaction by the EU, aiming to recover some of the public funds used to bail-out the financial industry. The policy is also aimed at limiting speculative trading, and to combine various levies already in force in several member states (Dendrinou 2015).

This report assesses the likelihood of this policy to deliver these anticipated results, particularly towards buffering the financial system against another crisis. Further, it evaluates the prospects of the adoption of an international agreement. To achieve this, the individual components of the agreement are highlighted, and their intended and possible outcomes defined. The opinions of experts, and different organizations are also integrated into the report.

The European Union Financial Transaction Tax (EU FTT)

The EU FTT is a proposal made by the European Union to introduce a tax for financial transactions between financial establishments that would be used to insure them in the event of an economic crisis like that experienced in 2007-2009. The EU put forth this proposal after trillions of Euros were used to support banks during the same period; it is viewed as a way to recoup some of these funds back. In addition, it would introduce restrictions to a vastly unregulated sector (Dendrinou 2015). However, it has become a controversial topic as member states took sides on whether it would meet its anticipated objectives, and that it would also introduce new challenges.

The framework proposal is supported by 11 states within the Union; which make up about 70% of the GDP. It aims to tax financial transactions between banks by charging 0.1% against the exchange of bonds and shares, and a tax of 0.01% against derivative contracts (Fehrmann 2012, p. 131-4). There is a concern that the introduction and implementation of these taxes will have a negative ripple effect on the real economy. To avert such an outcome, the following exemptions were made in the FTT;

• Transactions made under reconstruction-operations
• Daily financial activities by citizens and enterprises
• Refinancing transactions
• Investment banking transactions aimed at raising capital (Dendrinou 2015).

The proposal to introduce this tax was made when G20 leaders failed to reach a consensus on the need to impose a tax of financial transactions after the economic crisis. The total amount of public funds used to support the financial system within the EU is estimated to be about £1.6 trillion; although some estimates are as high as £4.6 trillion (Kawecka-Wyrzykowska 2015, p. 62-4). It is viewed as a necessary step among key members of the Union that restrictions should be introduced, and that some of these funds should be recouped. However, the members that constitute the EU have very distinctive economic policies, and the implementation of an overarching agreement was not welcomed by some states (Kawecka-Wyrzykowska 2015, p. 61).

Ten member states have already implemented financial taxes of this nature, and EU FTT would harmonise all their dealings. Germany, France, Spain, Belgium, and Finland supported the passing of the proposal. Notably, the UK, Sweden, and the Czech Republic were not in favour of its adoption (Kawecka-Wyrzykowska 2015, p. 61). The EU, and those in favour of the proposal, viewed it as a way to cut back on competitive distortions within the European economy. In addition, it would also inhibit risky trading activities, and support regulations made towards avoiding an economic crisis. However, this view was not held by all members. The United Kingdom was keen to use its veto power to reject the proposal. According to the UK, the proposal would be effective and beneficial if was imposed globally. Proponents of the proposal advocated for it to be implemented within the states that supported it, and gradually get adopted throughout the EU (Kawecka-Wyrzykowska 2015, p. 67-71).

Although it was expected to be in force by 2014, the proposal has continually been pushed forward and is likely to be finalized in mid-2016. Presently, ten member states have agreed on progressive taxes on equities, and derivatives, and are aiming to complete the final agreement on the details of increased tax harmonization.

2.1  Nature of the Taxes

The tax targets all financial transactions completed by financial institutions within the EU. Some of the notable institutions of this nature include investment firms, pension funds, insurance companies, banks, and hedge funds (Kawecka-Wyrzykowska 2015, p. 62). The taxes that will be introduced will cover more than three quarters of transactions between these institutions. Transactions with individual clients do not constitute viable contract. In addition, other transactions are exempted from the taxes. Some of these transactions include payments of insurance, bank loans, and mortgages. This has been done to avoid a negative reaction from the real economy (Fehrmann 2012, p. 137-8).

Another concern brought forth is that some countries will experience loss of revenue if the financial transaction taxes are introduced. The “Residence plus Issuance” resolution is meant to overcome this potential drawback; financial institutions are required to pay the taxes to their country of residence irrespective of the location of the transaction. Leaders of nations do not have to worry about the likelihood that institutions will redirect their finances elsewhere (Keen 2010).

Rates and Revenues

The tax rates to be imposed by the agreement have not been decided upon. For this reason, the specific amount in revenues is also not definitive. However, it is possible to estimate the possible figure based on the proposed rates. A factor that should be appreciated is that these taxes are expected to result in some form of reaction in trading volume; which can only be speculated. The EU has provided its revenue estimates as between £16 billion and £43 billion a year if a flat taxation rate of 0.01% was imposed. Another estimate under the condition that the taxation rate is 0.1% means that the revenues raised each years within the EU would be between £73 and £433 billion (Shackelford 2010).

However, the idea of a flat rate is not supported in the official proposal. Rather, it recommends a differentiated taxation model where shares and bonds are taxed at a different rate to that of derivative contracts (Shackelford 2010).

Reception

France, Germany, Belgium, Finland, Spain, and Austria have all shown support for the proposal. Notably, the proponents of the proposal constitute about 70% of the Eurozone GDP. The reason for this support is congruence with the EU that the implementation of the proposal will have a positive impact on the Eurozone. These countries had to provide the most significant backing for their financial institutions during the crisis, and have expressed outright support for the proposal. Another crisis like that experienced in 2008 would require further backing from the public sector. The use of financial taxes would curb risky transactions that would cause such a crisis (Virmani 2010). In addition, it would recoup some of the public money used to bail-out the financial system across the EU.

The United Kingdom, Sweden, the Czech Republic, and Bulgaria are some of the countries within the EU that oppose the implementation of the proposal. The UK is expected to use its veto power to block its adoption. The view by most opponents is that the FTT will not meet its anticipated outcomes, and that it will adversely affect some countries more than others. For instance, the UK cites that it would likely be responsible for collecting the taxes; increasing costs by about £4 billion. Estonia is against the adoption of the proposal because it would limit access to revenues.

	FTT Revenue	Loss of other Revenues	Increased cost of funding govt debt	Net Impact on Public Finances
Germany	16	5	9	+2
France	12	2	7	+2
Italy	9	6	8	-5
FTT zone	51	21	33	-4

Table 1: Estimated Impact on public finances

Source: Oxera and Oxford Economics analysis, drawing on Eurostat data for government debt and GDP

A study aimed to access public opinion within the EU about the FTT proposal established that there was great support for it. The poll consisted of more than 25,000 participants; where more than 60% supported the move, and only a quarter of participants opposed the move. Ironically, about two thirds of participants within the UK were in favour of the proposal (Pollin 2012, p. 96-7). A corresponding survey by YouGov found that about four in every five people in Italy, Germany, France, and the UK favoured a move similar to that intended by this proposal. Most of this support stemmed from the view that the financial sector required to be regulated, and be accountable for causing the economic crisis that rocked the Eurozone. Most political parties, including in the UK also showed a lot of support for the FTT.

However, one other notable reaction from was that it would be virtually impossible to implement such an international agreement. About 80% of participants in a survey within the EU agreed that a global agreement would not be possible; a view that the UK government used to base its opposition to the FTT (Pollin 2012, p. 96). The adoption of the FTT, according to the UK, would only be viable if it were done globally; an unlikely occurrence. It held the belief that an FFT imposed only in the EU would have adverse outcomes within the Eurozone.

Evaluation

Different views of the EU FFT have been expressed, particularly on its possible outcomes.

The European Union

The EU is responsible for the FTT proposal, and views it as a significant step forward. It is meant to be a response to the economic crisis in 2007-9, and the ways it was dealt with.

The EU expects the proposed FTT to result in a decline of about 90% in derivative transactions (Fehrmann 2012). This is modelled on the figures from the Swedish economy that has already adopted transactions taxes between financial institutions to attain similar objectives to those being aimed at by the EU. An evaluation by the EU also established that there would be a slight effect on the real economy; either a positive or negative. It is unpredictable how the Eurozone would react to the adoption of the FTT (Fehrmann 2012). For instance, a majority of the citizens in the member states backs it. This support is also apparent amongst the political parties. However, more taxes to businesses also has the possible effect of slowing down economic development. The EU is aware of these two possible divergent outcomes.

Another reason for the proposal by the EU is that it will curb on risky trading, and highly leveraged derivatives. The cause of the economic crisis was viewed to be mostly unregulated financial system that had adopted risky practices such as high-frequency trading (Peukert 2010, p. 830). This meant that it was likely to result in a crisis like that witnessed during this period. The FTT, according to the EU will curb on such practices.

Since it only requires the taxation of the specific financial transactions between financial institutions, there are no expected consequences to the real economy. In a study performed by the EU, the concern by some member states that financial institutions would opt to make transaction offshore was nullified (Zimmermann 2010).

The Council of the EU

The Council of the European Union initially assessed the legal ramifications of the proposal, and determined that it was an illegal act. It cited that the proposal would present an opportunity for the taxation of transactions that do not constitute systematic risk, and that are necessary to support the activities of other business entities. It reasoned that the proposal was illegal because it exceeded the jurisdiction of member states as provided for by the international customary law. In addition, it was deemed to be overstepping on the taxing activities of members states that were not participating. The Council also noted that the adoption of the proposal would cause a restriction on the free flow of capital, and would lead to the distortion of competition that it was meant to solve (Zimmermann 2010, p. 201-5).

However, the council also acknowledged the fact that the EU authorities had adhered to the appropriate approach by making a proposal, and that it can be revised and become acceptable to all members. The main reason for the illegality of the proposal was that it was in violation of the EU Treaty. However, the Council has changed its opinion by concluding that the proposal does not violate either the EU Treaty, or the customary international law.

Sovereign Organizations

The views of other independent agencies and experts has been critical to in defining the different stances on the proposal.

The European Parliament has sought the opinions of financial experts. Some institutions such as Colombia University have showed their support for the proposal which it holds will be effective in attaining its objectives because it is aimed at the right players and transactions. The university suggests that the Eurozone GDP will rise by a small margin if the proposal is approved. However, there is no census that these transactional taxes will avert another economic crisis. Rather, the taxes would be effective in reducing systemic risk, and hence lessening the possibility of a crisis (Peukert 2010, p. 832). This would not entirely solve the issue of a likely crisis; other actions such as financial regulation and supervision would be needed to bring about such outcomes.

The executive board of the European Central Bank has also shown support for the proposal for it provides more revenues and offers justice to the people.

Like in the case of the member states, many financial experts are divided on the matter.

Trade Unions and Civil Societies

Trade unions and civil society have offered a lot of support for the proposal. The move to implement a FTT is viewed as a way to create money for the public sector, and regulate the financial industry. The European Trade Union Confederation (UTUC) described the EU FTT proposal as a “necessary step to give public finances much needed boost for investment”. The expected results from the approval of the FTT are similar to those of the EU; lower unemployment, growth of economy, and make Europe more competitive (ITCU Press Department 2010).

The European Public Service Union, which supports the proposal, is unimpressed by the constant delays to the approval of the agreement. Some of the key components about the FTT such as the tax rate are yet to be agreed upon. In 2012, an overwhelming majority at the European Parliament had voted to implement the tax by 2014, but this has constantly been delayed. Final discussions are expected to be reached by the summer of 2016. The Robin Hood Tax campaign (RHTC), based in the UK, is still optimistic that progress will be attained, citing that 10 key member states have already shown commitment to the agreement. It reckons that it is not easy to implement new taxes in the financial sector because it might cause a cascade of adverse effects, but a lot of progress has already been achieved with the EU FTT (ITCU Press Department 2010).

The RHTC is backing negotiators and politicians to make the best version of the FTT as possible. The biggest challenge that it expects is the lobbying from banks, and other financial institutions (ITCU Press Department 2010). For most part, trade unions and civil societies agree that the FTT would be an effective way of raising money for the public sector. Since the financial industry is large, minimal rates of taxation would still amount to billions in Euros annually; without having negative impacts on the real economy.

On the debate on how far-reaching the agreement should be, the RHTC recommends that there should be an international dimension to it since the effects of an economic crisis are felt globally. Some of the countries supporting the FFT have indicated that the revenues collected would be used to for climate aid; an area that is critical, but poorly funded (Soederberg 2002).

The biggest win, for trade unions and civil societies, would be a symbolic one (ITCU Press Department 2010). The approval of the proposal would show that the European Union is willing to turn down appeals from the financial industry for the benefit of the public.

Alternatives for the EU

The EU has a number of possible alternatives it can consider to attain similar objectives.

Bank Tax

The EU FTT resulted when the G20 members did not reach a consensus on how to deal with the economic crisis of 2007-9. However, the G20 had requested the IMF to come up with possible ways to overcome the slowdown, and to find measures to avoid a similar incident; the bank tax was one of the solutions proposed. It is a tax on a financial institution’s assets or liabilities that are likely to be used to create an insurance fund to support then in the case of an economic crisis (Tewari 2004, p. 4406). This tax would act like the normal insurance policies that individuals or businesses take. Its purpose would be to insure banks and other financial institutions against collapse. The aim is to avoid having to use public funds to support banks in such a scenario. The IMF suggested that a flat rate should initially be levied, but should continually be refined.

Financial Transaction Tax

This tax is more dynamic because it targets a wide range of instruments such as bonds, currencies, and stocks (Baker 2001, p. 91). It was also broad because it would a global tax as opposed to localised taxes like the EU FTT. It would target a wide range of financial instruments all over the globe. Although this kind of tax was greatly criticised, many of the critiques including the IMF did concede that it should not be dismissed altogether.

Financial Activities Tax

This tax would be raised by finding a levy for the sum of the bank profits, and banker’s compensation packages. The IMF recommended that the revenue obtained from these taxes should be forwarded to the government (Forrest 2008).

Support for the FTT

Influential Support

One of the positives about the propose FFT is that is has been put forth; there is an effort to attain the predetermined objectives. This is one of the underlying foundations, and one that is likely to facilitate its approval. Although there are other proposed policies such as the Financial Crisis Responsibility Fee by the United States, the EU FTT is the most advanced, and discussed model (Pollin 2012). This allows for it to be refined based on complaints that are put forward. For this reason, it is likely to be adopted; and meet the objectives it is set for. Likely, because it is still being discussed, and there is a general consensus that its provisions should be refined further to incorporate the concerns of some of the member states.

Component	Oxera Estimate  (€ billion per annum)	Commission Estimate (€ billion per annum)
Securities	27.4	13.0
Shares	4.6	4.6
Bonds	22.8	8.4
Derivatives	21.0	21.0
Repos	2.2	nil
Total	50.6	34.0

Table 2: FTT revenue estimates

Source: Oxera calculations.

The EU FTT has had a lot of support; notably by countries making up 70% of the Eurozone. Such support has allowed the proposal to remain relevant, with the possibility of becoming more significant. Germany, France, Italy, Spain, Austria, and Belgium are some of the countries that have consistently backed the proposal (Shackelford 2010). This is important for its adoption because they are key members within the zone. Further, after facing opposition from opponents such as the UK, they resorted to advocating for an agreement to be reached some of the proponents. Their influence is considerable within the Eurozone, and this is likely to lead to the approval of the proposal. Further refinements to its provisions may be required.

Need for Regulation

Some of the other influential supporters of the FTT are the citizens of the Eurozone. There is a general feeling that there should be regulation within the financial industry (Kuştepeli 2006, p. 78). This feeling has also been shown by a majority of political parties across the continent (ITCU Press Department 2010). This is an important factor to consider because of the influence the population has on policy-making. The constant delays being made to reaching a consensus can be viewed as an upside to making the FTT more effective.

Trade Unions and Civil Societies

Another source of support that is likely to see the proposal endorsed comes from trade unions, and civil societies within the EU. Like in the case of citizens in the member states, these institutions would opt to see more regulation within the finance industry. The EU FTT is presently one of the best ways that can be achieved. The finance sector has taken up a lot of resources from the public sector. There is general discontent within the public, and the institutions that support them to take steps to recoup some of these funds. The FTT aims to do just that. Imposing taxes on financial transactions between financial institutions allows some of the funds held up by such institutions to be accessible to the public (ITCU Press Department 2010). This is one of the reasons most trade unions and civil agencies are showing support for the FTT.

Lack of Alternatives

At present, the EU FTT is the most elaborate proposal towards attaining a regulation within the financial sector. There are other alternatives sought such as the bank tax, financial transaction tax, as well as the financial activities tax; but none is likely to be more effective. The main concern about all other alternatives that are available to the EU is that they are more likely to cause a negative impact on the real economy. This would be unacceptable to the Eurozone.

Problems with the FTT

There are reasons that form credible basis why the EU FTT would not be successful.

Opposition within the EU

The first of such reasons is that there is considerable opposition against it. For instance, the United Kingdom is expected to use its veto power in the European Union to oppose the endorsement of the agreement (Dendrinou 2015). This is likely to be a big blow, and one that increasingly looks unavoidable. Some of the proponents of the policy advocate for there to be an agreement between some of the member states, which would then pave way for the others. The possibilities that this would result in the anticipated outcomes is a long-short, in a very diverse economy. It is conceivable, that the opposition towards the policy will eventually lead to its downfall. A major concern by many economies is that the adoption of the FTT would lead to increased costs in funding government debt as shown in table 3;

Economy	Gross government debt (€ billion, 2012)	Increase in funding costs (€ billion per annum)
Austria	227	0.9
Belgium	375	1.5
Estonia	1.7	0.007
France	1,834	7.3
Germany	2,166	8.7
Greece	304	1.2
Italy	1,989	8.0
Portugal	204	0.8
Slovakia	103	0.4
Slovenia	37	0.15
Spain	884	3.5
Total	8,126	32.5

Table 3: Impact on the cost of funding government debt

Source: Eurostat data and Oxera calculations.

Negative Impact on Real Economy

Besides the opposition from key members such as the UK, there is a general concern about how the adoption of the policy would impact the Eurozone (Dendrinou 2015). This is a serious issue, and the possible outcomes are solely based on speculation. Since the taxes are targeted on the transactions that do not relate to the real economy, there is are some members who do not expect any adverse effects on the economy. However, it could mean that financial institutions have to restructure with the aim of executing adapting to the taxes, and inevitably negatively affect the economy. Such concerns have made many members such as Estonia to oppose the policy.

Lack of an International Agreement

The United Kingdom cites the need for the FFT to be global for it to be effective, and that a localised agreement within the EU would not meet the objective of mitigating a crisis. For instance, the economic crisis of 2007-9 was triggered in the United States and had a global impact. The emphasis by the EU to implement a regional policy would not hinder the occurrence like the previous, or most of the effects that result. The possibility of an international agreement are legible. The United States has clearly stated that it would not be interested in such a policy. G20 leaders failed to reach a decision on the need to implement an international agreement that would be more effective in curbing the chances of a global economic crisis (Keen 2010).  A localized policy like that proposed by the EU would not eliminate the possibilities of a crisis altogether. The 2007-9 crisis for instance was caused by a disruption in the United States’ financial system. The most effective way of overcoming such a scenario, as put by the UK, is to have an international agreement.

Discussion

Arguably, the main question relating to the EU FTT is whether it is likely to attain the set objectives. The EU contend that the adoption of the FFT would provide regulation within the financial industry, discourage risky trading, and ultimately inhibit another economic collapse. Some experts do not agree with the idea that the proposal would attain these objectives, including some governments in the EU. Their argument is concrete, it is likely that the FTT would not have avoided a crisis like that witnessed in 2007-9. The notion that it would prevent another similar scenario is speculative, but not definite.

However, there is also the question of whether the EU will adopt it. This is a likely scenario, particularly because of the support it is getting from some key members. Countries in support of the proposal make up about 70% of the Eurozone GDP. This is a lot of influence that is likely to see the proposal adopted. A view that might support this is that presented by the IMF recommending for refinements of the agreements to be made continually. The opposing states are likely to find it more challenging to contest such influential support.

Notably, another source of great support for the proposal is from the general public. There is a generally-held opinion that the financial industry needs to be regulated. The introduction of a proposal by the EU has been welcomed by a majority of citizens of the Eurozone. It sells the idea that the financial industry should be held accountable for the previous economic crisis, and that there should be efforts aimed at recouping some of the public funds used to support it from collapse; this has gained a lot of support from the public. Most trade unions, and civil societies within the region also see the FTT as a positive move, and would opt for it to be approved.

Although continued delays have disappointed many, they have also allowed for more refinement of the provisions in the proposal, and also drawn more attention to the matter. A major blow to the credibility of the FTT is in that it is almost impossible for there to be a global agreement on the issue. The interconnected nature of global trade inevitably means that there is a chance there will be another crisis if international initiatives such as the EU FTT are not adopted (McClure 2004, p. 28). The move by the EU can be viewed as a positive, and important endeavour to overcome some of the economic issues of our times.

A crucial reason why the FTT is likely to be effective in attaining its objectives is that the FTT is keen to avoid any reactions by the real economy. This is a major issue, and one that the proposal has acknowledged, and effectively dealt with. The proposed taxes would target financial transactions within the financial industry, whilst avoiding transactions that have an impact on the real economy. This would mean that the financial industry would bear most of the burden, and that massive revenues would be injected into the public sector. It is one of the main reason for the massive support the proposal is attracting.

Conclusion

The EU FTT is one of the most elaborate proposals on how to cope with the economic crisis of 2007-9. It offers a way forward by finding ways to rejuvenate the economy whilst implementing strategies that inhibit a similar crisis. It proposes that there should be taxes levied on financial transactions made between financial institutions to recoup some of the finances used to support the industry from collapse. Further, the taxes would curb on risky trading, and present new regulations to a mostly unregulated sector. If approved, it would be implanted within the Eurozone and expected to collect billions of Euros in revenue each year.

However, the proposal has yet to receive the sought of support that could lead to its approval and implementation. There are a number of member states strongly opposing the FTT. The United Kingdom, for instance, is expected to use its veto power to reject the proposal. This is in contrast to the views held by the majority of Europeans. There is great support for the proposal within the Eurozone, more so because it would recover revenues for the public sector. There is also a general consensus that the financial industry needs to be regulated (Kuştepeli 2006, p. 78); the proposal offers the best chance to achieve this.

The major debate is on whether it can deliver on its predetermined objectives. Some member states do not think so. One of the main areas it is expected to fail is on its commitment to avert a global economic crisis. Categorically, the proposal would not guarantee that there would not be another crisis. However, its proponents cite that it would be a massive step towards such a case. The chances of attaining a universal agreement is miniature. The proponents of the FTT cite that it would trigger a positive move towards global regulation of the financial industry, and inevitably inhibit a scenario such as that witnessed in the 2007-9. This is accurate, the IMF has already proposed similar measures, and the United States has proposed the Financial Crisis Responsibility Fee to meet similar objectives.

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