The European Union financial transaction tax (EU FTT) is a proposal made by the European Commission to introduce a financial transaction tax (FTT) within the 27 member states of the European Union by 2014. The tax, if implemented, would impact financial transactions between financial institutions charging 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts.
The proposed EU financial transaction tax would be separate from a bank levy, or a resolution levy, which some governments are also proposing to impose on banks to insure them against the costs of any future bailouts. The tax that could raise 57 billion Euros per year[1] remains controversial among EU member states.[2]
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On June 28, 2010, the European Union's executive said it will study whether the European Union should go alone in imposing a tax on financial transactions after G20 leaders failed to agree on the issue. The following day the European Commission called for Tobin-style taxes on the EU's financial sector to generate direct revenue for the European Union. At the same time it suggested to reduce existing levies coming from the 27 member states.[3]
On September 28, president of the European Commission Jose Barroso officially presented a plan to create a new financial transactions tax "to make the financial sector pay its fair share".[4] 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%. Given 10 EU member states already have a form of a financial transaction tax in place, the proposal would effectively introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU. According to the European Commission this would also "help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises". The EU FTT could approximately raise €57 billion every year. These revenues 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. EU member states may decide to increase their part of the revenues by taxing financial transactions at a higher rate. If adopted the EU FTT will come into effect on 1st January 2014.[4][5]
An institution would pay the tax rate appropriate to the country of its residence, regardless of the location of the actual trade. If acting on behalf of a client, e.g., when acting as a broker, it would be able to pass on the tax to the client.
An official study by the European Commission predicted the following impacts of a financial transaction tax levied at 0.1 per cent on stocks and bond trades, and 0.01 per cent on derivatives:[6]
France, Germany, Spain, Belgium, Finland spoke in favor of the EU proposal.[1] Austria and Spain are also known to support an EU FTT.[7] Nations that oppose the proposal include the United Kingdom, Sweden, the Czech Republic and Bulgaria.[1]
The Commission proposal requires unanimity from the 27 Member States in order to pass. The UK government has expressed strong views about the negative impact of the tax and is expected to use its power of veto to block the implementation of this proposal, unless the tax was to be introduced globally. The likelihood of a global FTT is low due to opposition from the United States.[7] As a way out, advocates of the FTT such as the finance ministers from Germany, Austria and Belgium have suggested that the tax could initially be implemented only within the 17-nation eurozone, which would exclude reluctant governments like the United Kingdom and Sweden.[8][9]
Former IMF Chief Economist Kenneth Rogoff remains critical of a FTT, saying "Europeans concluded that an FTT’s political advantages outweigh its economic flaws...there certainly is a case to be made that an FTT has so much gut-level popular appeal that politically powerful financial interests could not block it."[10] Rogoff also proposed an alternative perspective of the European Commission’s motives:
"Perhaps officials noticed that virtually everything in Europe is already heavily taxed. So, rather than finance the European Union’s institutions through greater contributions from existing tax bases, they are seeking a consensus for new revenue sources. Or perhaps the Commission realizes that the FTT will be dead on arrival, owing to disputes within Europe, and simply wants to gain political capital from an enormous popular proposal."
A recent Eurobarometer poll of more than 27,000 people published in January 2011 found that Europeans are strongly in favour of a financial transaction tax by a margin of 61 to 26 per cent. Of those, more than 80 per cent agree that if global agreement cannot be reached - a FTT should, initially, be implemented in just the EU. Support for a FTT, in the UK, is 65 per cent. Another survey published earlier by YouGov suggests that more than four out of five people in the UK, France, Germany, Spain and Italy think the financial sector has a responsibility to help repair the damage caused by the economic crisis. The poll also indicated strong support for a FTT among supporters of all the three main UK political parties.[11][12]