Towards a Financial Transactions Tax? - European Union Committee Contents

Towards a Financial Transaction Tax?

CHAPTER 1: Introduction

1.  The period since the eruption of the global financial crisis in 2008 has been one of perpetual flux in the political, economic and financial spheres. As politicians have grappled with the crisis, there have been increasing efforts to deal with its consequences. The European Commission has brought forward a large number of proposals since 2009 (see Box 1 below). The financial sector has been a focus of these efforts. Before the crisis broke, there was widespread (although not universal) support for light-touch regulation of financial practices and markets. The conclusion in many quarters that the unwise practices of various financial institutions was a significant cause of the crisis has caused attitudes to change. In addition, there is a common perception that the financial sector does not pay its fair share, as well as widespread anger at the level of pay and bonuses in the financial sector at a time of economic austerity. In this context, there is a desire amongst many to see the financial sector make amends for its perceived mistakes.


Recent Commission Legislative Proposals in Relation to the Financial Sector[1]
  • 2009: Proposal for a new European Systemic Risk Board (ESRB) and European Supervisory Authorities (ESAs) for banking, securities and markets, and insurance;
  • 2009: Alternative Investment Fund Managers Directive (AIFMD);
  • 2010: Regulation on over-the-counter (OTC) derivatives;
  • 2010: Regulation on short selling and certain aspects of credit default swaps;
  • 2011: Revision of the Capital Requirements Directive for banks (CRD4);
  • 2011: Revision of the Markets in Financial Instruments Directive (MiFID) and new measures on market abuse;
  • 2011: Amendment of the Transparency Directive;
  • 2011: Directive and Regulation on Credit Rating Agencies (CRA3).

2.  It is in this context that the proposal for a Financial Transaction Tax has emerged. Yet the model on which it is based is not new. In the early 1970s, an influential American macroeconomist and recipient of the Nobel Prize for Economics, James Tobin, brought forward a proposal in the aftermath of the 1971 collapse of the Bretton Woods exchange rate system.[2] His eponymous proposal was to levy a tax of 0.1% on every amount exchanged from one currency to another. The intention of the proposal was to reduce exchange rate volatility by discouraging short-term currency speculation, but at a rate small enough not to inhibit trade.

3.  Although the Tobin Tax idea did not gain traction immediately, it has returned to the agenda from time to time, particularly during periods of financial crisis. In the midst of the Asian financial crisis in the late 1990s, a Tobin Tax was advocated by the anti-globalisation movement. And now, in the context of the current crisis, the idea has once more been resurrected, albeit in a modified way, in the form of a 'Financial Transaction Tax' (FTT). According to the European Commission, an FTT is designed to tax the value of single transactions of a broad range of financial instruments, including equities, bonds, currencies and derivatives. However, others have advocated a more limited application, for instance on currency transactions.[3]

4.  The push for such a tax is broad-based, and a number of different reasons for introducing the tax have been advanced. A high-profile campaign, including some economists, trade unions, celebrities, charities and faith groups, has advocated the tax as a means of reducing poverty and/or tackling climate change. The Robin Hood Tax campaign, who have spearheaded support in the UK, describe it as "a tax on banks that would give billions to tackle poverty and climate change, both here and abroad."[4] National leaders, including the German Chancellor Angela Merkel, and, most prominently, the French President Nicolas Sarkozy, have pushed hard for the tax to be introduced as a means by which the financial sector can make a contribution to recouping the costs of the financial crisis. At the European Council meeting on 11 March 2011 the heads of state or government of the euro area agreed that "the introduction of a financial transaction tax should be explored and developed further at the Euro area, EU and international levels."[5] Others have stressed the value of an FTT along the same lines as Tobin's original proposal, in seeking to curb perceived harmful speculation.[6] And the European Commission, led by the Commission President José Manuel Barroso, has advocated the tax as a "question of fairness".[7]

5.  However, support for an FTT is far from universal. Leading economists such as Professor Charles Goodhart and Paul Volcker have criticised the proposal as technically flawed.[8] The financial sector has warned of the damaging impact such a tax would have on that industry, and several world economic heavyweights, most notably the USA, remain steadfastly opposed to its introduction. The UK Government too, whilst stating that they would not oppose its introduction at global level, have remained consistently opposed to the introduction of a tax at EU level. The Prime Minister, David Cameron, has called such a proposal "madness", whilst the Chancellor of the Exchequer, George Osborne, has called it "a bullet aimed at the heart of London".[9]

6.  Notwithstanding these objections, the European Commission has been actively considering the case for the introduction of an FTT. It first exposed the idea in October 2010, in its Communication on Taxation of the Financial Sector. Although at that stage it appeared to favour the introduction of a Financial Activities Tax (FAT) as a tax on the total value added generated by a financial sector company,[10] in September 2011 the European Commission published its own proposals for an FTT.[11] It was in that context that this inquiry was launched. In October 2011, we announced our intention to investigate the rationale behind the introduction of a financial sector tax, focussing primarily on the Commission's proposal for an FTT. We sought to consider the potential risks, benefits and shortcomings of an FTT, its potential to dampen speculation on the financial markets, and its significance for the City of London. We also sought to assess whether an FTT could plausibly be implemented at an EU level, or whether it would only work effectively if implemented globally.

7.  Since the Commission's proposals were published, the debate has gathered pace. Most notably, in January 2012, President Sarkozy announced that France would introduce a tax on share trades in August 2012. This proposal has been interpreted as broadly based on the UK stamp duty. In the meantime, the Commission's proposals remain under consideration, with the UK continuing to make clear that it intends to oppose an EU-wide tax. However it was reported in March 2012 that the Commission were being encouraged to consider "alternatives" to their proposal, potentially including the stamp duty model. We have sought to reflect these developments in the report.

8.  During the course of this inquiry, we received written evidence from 34 witnesses, and have heard oral evidence from economists, campaigners, financial institutions, representative organisations, as well as from the Financial Secretary to the Treasury, Mark Hoban MP, and from the European Commissioner for Taxation and Customs Union, Audit and Anti-Fraud, Algirdas Šemeta. There appeared to be a considerable degree of uncertainty and misunderstanding about the effect of the Commission's proposals. In addition, a stark division of views was apparent in the evidence that we received. Whilst the campaigning organisations, trade unions and those MEPs who got in touch with us were fervently in favour of an FTT, financial institutions and other financial sector representatives were equally firm in their opposition. Whilst this division of opinion was perhaps to be expected, we are grateful to all of our witnesses for their assistance. We recommend this report to the House for debate.

1   The dates refer to the year in which the proposal was first brought forward. Back

2   An arrangement of fixed exchange rates ultimately based on the US dollar's peg to gold. See 'The Tobin Tax explained', by Martin Sandbu, Financial Times, 28 September 2011. Back

3   Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Taxation of the Financial Sector, COM (2010) 549 FINAL. Back

4 Back

5   See European Commission proposal for a Council Directive on a common system of financial transaction tax and amending Directive 2008/7/EC, footnote 2, COM (2011) 594 FINAL. Back

6   See paras 27-39 below. Back

7   José Manuel Durão Barroso, President of the European Commission, European renewal-State of the Union Address 2011. Back

8 Back

9   See, 26 January 2012 and "Fix this euro crisis with the smack of firm government", by Rt Hon George Osborne MP, London Evening Standard, 14 November 2011. Back

10   COM (2010) 549 FINAL, op. cit. See Chapter 5 below. Back

11   COM (2011) 594 FINAL, op. cit. Back

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