Will the financial transaction tax fly?

Cash strapped governments in the EU strive to find a source of income that will help them ease the pressure on long suffering citizens who have taken the brunt of the financial crisis in the last four years. Various countries have used taxpayers’ money to rescue banks from their own foolish mismanagement. It was undoubtedly the lesser of two evils as letting major banks fail would have brought about even more misery and economic meltdown.

Various countries have used taxpayers’ money to rescue banks from their own foolish mismanagement- John Cassar White

So when the European Commission proposed a financial transaction tax – an FTT – many thought that a partial remedy was found in that banks would have to contribute to the good of society rather than be a burden on it. But such logic proved to be too simplistic. Countries like Britain, Sweden and Malta, amongst others, understandably objected to the introduction of this tax unless it was applied on a global level. Since the US has no intention to rush into introducing such a tax, Britain’s veto is likely to stop the introduction of an FTT throughout the EU anytime soon.

Countries that oppose the introduction of an FTT believe that such a move would threaten their prosperous financial services sector. Unless this tax is applied on a global level, banks would have an incentive to move to countries not charging such a tax, thereby threatening job losses in the countries where they are based at present. These countries also come up with arguments about the difficulty of monitoring such transactions in a world where electronic trading makes it almost impossible to tag transactions for tax purposes. Moreover, it is often argued by opponents of this tax that ultimately it is consumers who have to pay such taxes.

The counter arguments of supporters of this tax list a number of advantages linked to an FTT. The economists Stephany Griffith-Jones and Avinash Persaud argue that such a tax could help governments to reduce their debt burden – a measure that the IMF, the ECB and the European Commission itself are promoting as a means to exit the current economic crisis. These economists also criticise the UK’s stand when they say: “The UK government’s continuous riposte that it would only support a tax if it was global to limit avoidance is perverse logic as one of the oldest and largest financial transaction taxes successfully functions in the UK that levies a Stamp Duty Reserve Tax of 0.5 per cent on transactions in UK equities”.

Perhaps an even more solid argument brought by the pro FTT lobby is that the income from an FTT could be used for productive public investment “for example in green infrastructure or to help catalyse increased production and innovation in SMEs”. An FTT income used in a fiscally neutral way would help governments to reduce other taxes like VAT and income tax or at least not increase them to the extent that they would have to if no new income was forthcoming.

While it is unlikely that consensus on this tax will be reached any time soon, it seems that France intends to push ahead with the introduction of an FTT in the coming months despite opposition from Britain and other eurozone countries like Ireland and Malta. Francois Baroin, French Finance Minister, in an interview with the Financial Times, was asked whether the tax would end up bolstering the position of London’s financial services sector. He said: “We don’t think about it like that. But it is difficult for the UK to criticise this tax as madness, since stamp duty served as its inspiration”.

With Germany among the countries supporting the introduction of an FTT, many analysts consider the French move as “the first step towards an FTT in the heart of the European Union, if possible or at the very least in the eurozone.” While the French FTT falls well short of the model proposed by the EU, since it limits itself to the purchase of shared of companies quoted on the Paris bourse with a market value of €1 billion or more, it will undoubtedly put pressure on other countries to comply with this requirement that seems to enjoy popular support.

Mr Baroin used populist arguments to justify his countries pro FTT stand: “Everything is taxed – when you buy an apartment it’s taxed, when you buy a kilo of tomatoes it’s taxed, when you buy a television, it’s taxed, So why shouldn’t buying a share in a company be taxed?”

johncassarwhite@yahoo.com