16 Feb 2013

Yippee - the EU goes for an FTT!

I've set up a Google Alert for "Financial Transaction Tax" which generates a daily list of reports on the web mentioning the term. Usually, it generates a few new entries every day. But in the last 48 hours, the activity has been enormous. 39 yesterday morning, and a further 19 this morning.

The reason? The decision by the EU to back the introduction by 11 Eurozone countries of a Financial Transaction Tax. The original memo from the EU, which is in the form of an FAQ, can be found here, and full details of the Commission's proposals can be found here.

One of the most amusing features of the proposals is the "residency principle". I quote:
"This means that the tax will be due if any party to the transaction is established in a participating Member State, regardless of where the transaction takes place. This is the case both if a financial institution engaged in the transaction is, itself, established in the FTT-zone, or if it is acting on behalf of a party established in that jurisdiction."
This has led to squeals from the City. For example, as reported by Bloomberg "E.U. Levy a back door tax on London, U.K. Firms say". This is pure hypocrisy. The UK has been slapping a 0.5% stamp duty reserve tax (SDRT) on all trading in the shares of UK registered firms - wherever they occur - since 1986. As Wikipedia notes "A unique feature of SDRT, compared to other purely domestic taxes in the United Kingdom, is that more than 40% of the annual intake is collected from outside the UK, thus creating an annual inflow of approx. £1.5 billion pounds from foreign investors to the UK government."

So, it's ok if the UK does it, but it's terrible if someone else tries it. 

The Commission reckons that the tax will raise between 30 and 35 billion euros a year. Frankly, I suspect that this will be an underestimate - and that they are deliberating underplaying the potential revenues. After all, my calculations based on combining ECB and BIS figures showed that financial transactions within the Eurozone were over €2 quadrillion in 2011. It's true that, so far, two big players within the Eurozone have yet to join (Netherlands and Luxembourg), but hopefully, they will see the light.

But it is also clear that there is enormous untapped potential revenue that would be gained by increasing the scope. For example, I see no reason why foreign exchange transactions should be exempt. Indeed, as I have argued previously, it would be a very natural thing for the Eurozone countries to impose an FTT on all foreign exchange transactions involving Euros. I estimated that there were something like €300 trillion per year of foreign exchange in Euros. And since credit card companies and banks charge us all around 2-3% every time we convert from one currency to another, I see no reason why the Eurozone governments shouldn't do the same thing when the traders use our currency.

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