Towards a Financial Transactions Tax? - European Union Committee Contents


156.  This inquiry has found that the ongoing debate over the introduction of an EU Financial Transaction Tax is highly contentious. Whilst its advocates see the introduction of such a tax as an urgent "question of fairness", its opponents maintain that, at a time when growth is needed, an FTT would do significant harm to the economic health of the EU. These entrenched positions are almost impossible to reconcile.

157.  We have assessed the five objectives set out by the Commission behind its proposal for a Financial Transaction Tax. We are not convinced that the proposed model would meet any of them. We find it wholly unrealistic to suggest that an EU tax will pave the way for a global FTT. Whilst there is a stronger case for suggesting that the financial sector should make a contribution to the costs of the financial crisis, and for seeking to deter certain transactions, in neither case is the Commission's position compelling. Whilst we acknowledge the strength of public anger against the financial sector, and the widespread view that those who contributed to the current financial crisis should contribute to its costs, we fear that a Financial Transaction Tax is the wrong way to seek to meet such demands.

158.  We have analysed the design of a Financial Transaction Tax that the Commission proposes, and have found that it contains significant flaws. We note that even advocates of an FTT have criticised the Commission's model. We have concluded that the residence principle is both impractical and unworkable, and that there is a strong likelihood that financial institutions will relocate away from the EU. There is also considerable uncertainty about the likely incidence of the tax and its effect on consumers, the likelihood of a cascade effect, and, in particular, the potential negative impact on economic growth. The imposition of such a tax could have significant deleterious consequences in the current economic climate. If a financial taxation proposal is to be seriously contemplated then it is imperative that any proposed tax is as well-designed as possible. In our view, the Commission's proposed model is unworkable, and the Government should refuse to agree to the proposal.

159.  Yet the debate about whether and how the financial sector should be taxed will go on. Other models have been put to us, notably the adoption of a tax on the trading of shares on the basis of the UK Stamp Duty model. Whilst there appears to be a growing political momentum behind this idea, it remains to be seen whether such proposals will come to fruition.

160.  The UK Government have made clear that they would oppose any EU-wide Financial Transaction Tax. Yet it is vital that they remain engaged in the debate. The UK financial sector, based in the City of London, is of fundamental strategic importance, not only for the UK but for the EU as a whole. The Government should therefore seek to influence ongoing discussions as much as they can. However much the Government might oppose an FTT, the implications for the UK are far too great for the debate to be dismissed.

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