EU Commission envisions bank and transaction taxes

The European Commission laid out
its ideas for future taxation of the financial sector in an official
communication on 7 October.

The Commission works on the
assumption that, after having caused the financial crisis and received
substantial government support, the financial sector should make a “fair
contribution” to public finances, urgently needed by governments in the current
economic climate.

A tax on banks would also
complement required regulatory measures to improve the efficiency and stability
of financial markets, the Commission said. In addition, the Commission examined
the financial sector’s current contribution to public finances and assessed
that, given its exemption from value added tax in the EU, new financial sector
taxes would result in a fairer and more substantial contribution to public
finances by the industry. The Commissioner for Taxation, Customs, Anti-fraud
and Audit Algirdas Šemeta said: “There are good reasons for taxing the
financial sector and feasible ways to do so.”

The Commission favours a
two-pronged approach involving a global Financial Transaction Tax and an
additional Financial Activities Tax at EU level. Advocating a global financial
transaction tax that should be applied to a broad range of financial
instruments, including shares, bonds, currencies and derivatives, the Commission
estimates that, based on 2006 data and assuming a tax rate of 0.1 per cent, EUR60
billion could be raised from taxing stock and bond transaction alone.

This amount could be up to ten
times higher if derivatives transactions would be subject to taxation, but the
Commission acknowledged problems with establishing the tax base for these types
of instrument.

The Commission also recognises that
there is typically a gap between expected and actual revenues, but believes
that an EU wide transaction tax on exchange traded stocks and bonds would yield
about EUR20 billion, even if the transaction volume dropped by 30 per cent for
bonds and 20 per cent for shares. However, there would be issues, such as
relocation and tax avoidance, with implementing such a tax only on a national
level, the Commission communication noted. In contrast a global FTT “could be
an appropriate option as a revenue raiser in particular to provide financing
for global policy goals,” the Commission said.

In order to work effectively
participating countries would have to come to an agreement on financing that is
acceptable to all. “The Commission is committed to continuing to work with its
international partners, in particular in the G20, to reach such an agreement,”
the communication said.

The Commission would like to adopt
the financial transaction tax in combination with a EU-wide Financial
Activities Tax, an idea first suggested by the International Monetary Fund. It
is estimated that the FAT, which would tax corporations rather than
transactions, could raise up to EUR25 billion within the EU.

The FAT is better suited to raising
revenue for national consolidation, the EU said, because it would be more
evenly spread than a tax on transactions that mainly take place in a few
financial centres.

However, as the FAT would be
applied to profits and remuneration, it could contribute to existing incentives
for shifting income and profit out of the EU, the Commission admitted, saying
it would launch an impact assessment and propose policy initiatives in 2011.

The Commission will also present
its communication to EU Finance Ministers at the ECOFIN Council on 19 October
and to EU heads of state and government at the European Council at the end of
October. An EU position on financial sector taxation, aimed at encouraging international
partners to agree on a global approach, will then be presented at the G20
summit in November.


  1. And I tought I was spitting in the wind. If you don’t do it, someone will do it for you. I really like the tought;. However, there would be issues, such as relocation and tax avoidance, with implementing such a tax only on a national level, the Commission communication noted. In contrast a global FTT "could be an appropriate option as a revenue raiser in particular to provide financing for global policy goals," the Commission said.

  2. Regarding advantages and disadvantages of a bank transactions tax, let me draw your attention to a recent book that discusses the Brazilian experience with its use as internal form of taxation.
    The book is available at Amazon and is called.
    Bank Transactions: Pathway to the single tax ideal by Marcos Cintra, a Harvard trained professor of Economics in Brazil.
    After all, is a Bank transactions tax a bad idea?
    This book proves that this modern tax technology may become the building block for tax reform around the world.
    Tax reform is a recurrent theme in public policy around the world. Nevertheless, since the spread of value-added taxes VATs in the second half of the nineteen hundreds, little technological progress has taken place in this important field of public policy.
    This book brings fresh new concepts into this debate, and shows that
    a- value-added taxes can be rightfully challenged in its presumptive virtues of neutrality, efficiency, economicity, and equity, especially in countries with a federal political organization, and
    b- bank transactions taxes, a tax species that evolved directly out of technological modernization of monetary and banking institutions with the coming of the electronic age, could displace VATs as the predominant element in tax reform around the world.
    The typical criticism of turnover taxes, such as a bank transactions tax, stresses the allocative distortions which they presumably introduce in the economy through massive relative-price changes introduced by its cumulative nature.
    In this book, such widely accepted truth, which has become dogma among economists, is carefully tested through the use of input-output simulation models for 110 products constructed from Brazilian National Accounts data. It is shown that such uncritical belief in the superiority of value-added taxation is based on a set of strong assumptions which are, nevertheless, seriously weakened by lack of empirical validation.

    The conclusion is that since bank transaction taxes require lower tax rates than VATs to collect a given revenue target, they introduce less allocative distortions than conventional tax systems, and can be more efficient than value-added taxation.
    Best regards
    Luis Carlos da Silva

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