Rejecting proposed EU tax

It is not only most member countries of the European Union and the eurozone that are strapped for cash. The European Commission is not flush with money, either. It finds it difficult to cut spending, as many euro governments are doing. So it came up with a proposal to increase revenue by introducing a new tax, also presenting it as a matter of equity. The proposal is for an EU-wide Financial Transaction Tax. The proposed measure, dubbed a “Robin Hood” tax, is polarising EU member states.

The European Internal Market and Services Commissioner, Michel Barnier, visited Malta for one day to explain the tax and try to coax the government away from its opposition to it. He said the Commission was proposing “a rather small tax” to claw back some of the support governments gave the financial sector when markets collapsed in 2008. He knew that the Malta government opposed the tax on the basis that once it would not be worldwide it could cause financial companies to relocate outside the EU.

That could hit Malta badly, since it now houses hundreds of such companies which, together with the earlier financial institutions, including our two large banks, now account for some 7.5 per cent of the island’s domestic product. They also make a substantial contribution to income tax revenue.

When asked for his reaction to Malta’s stand, Mr Barnier said the Commission was engaged in discussions “as normal” with the Maltese government. The Times reported that the Finance Minister, standing next to Mr Barnier for the joint press conference, said nothing. While the minister was right to keep his counsel, Malta’s position is clear enough.

That, needless to say, did not deter the Commissioner from arguing the perceived merits of the tax. He told the media, as he must have told the government that the tax was “technically easy to implement, economically bearable, financially productive and politically just”. He added the Commission could only propose legislation and the final decision had to be taken by the Council of Ministers and the European Parliament.

Not everybody in Malta is against the tax. Michael Briguglio, chairman of Alternattiva Demok­ratika, has called on the government to support the Financial Transaction Tax. The party describes the proposed tax as a gesture of solidarity. Mr Briguglio said it would help generate revenue that could be used to strengthen the European economy.

“If workers and employers are paying tax to help sustain economic and social stability, it is only fair that banks and financial institutions do the same,” The Times reported Mr Briguglio as saying. In that regard the point is whether it would be the banks that would actually pay the tax. The more likely outcome would be that the banks pass it on to their clients.

The position of those who are against the proposed tax, with the United Kingdom leading the pack, found solidly argued support from a Maltese tax expert, among others. In a new policy paper on the EU Commission’s proposal John Vella, Senior Research Fellow, Clemens Fuest, Research Director and Tim Schmidt-Eisenlohr, Research Director from the Oxford University Centre for Business Taxation at Saïd Business School, argue that the FTT is the wrong instrument to address the issues raised by the financial crisis. Their conclusions justify the UK’s strong opposing stance.

Dr Vella also gave evidence at the House of Lords EU Sub-Committee A (Economic and Financial Affairs, and International Trade) meeting on the proposed Financial Transaction Tax. His main points were the following:

There is a reasonable case for raising more tax revenue from the financial sector. However, there are better instruments than the FTT for achieving the revenue raising objective.

There is no evidence that the FTT is a “Robin Hood” tax, falling more on the rich than the poor, or on bankers rather than the rest of society. It is most likely that the tax would be passed on in higher prices to investors and traders.

There may be concerns about the social costs of high frequency trading, but even if these exist they would be better addressed through regulation than the FTT. The financial crisis was not caused by high frequency trading.

As proposed by the Commission, the FTT would be easy to avoid by shifting transactions outside the EU. There is no evidence that other countries would follow the EU lead by introducing an FTT.

The Commission’s own Impact Assessment contains clear evidence against introducing the FTT.

There is no basis for the Commission’s suggestion that the FTT should be used to provide resources for the EU: the tax would fall disproportionately on the UK because of its large financial sector.

“The UK is therefore right to oppose the Commission’s proposal for an FTT,” said John Vella. “There are good reasons to impose a further tax on the financial sector, but this should be done through different taxes such as the Bank Levy – already introduced in the UK – or a Financial Activities Tax.”

The Finance Minister will no doubt be heartened by the cogent arguments used by John Vella, supporting his own as they do. The financial sector, on the other hand, will wonder how the story will end.