January 24, 2012
As support grows for a European Financial Transaction Tax (FTT) so do the number of negative myths being put forward by its opponents. The key criticisms are:
- An EU FTT will cause business to relocate
- An EU FTT will negatively impact on growth and jobs
- An EU will hit savings, pensions or small businesses
- An FTT is a Brussels tax grab designed to fill EU coffers
Each can be shown to be false.
> > An FTT will cause business to relocate
The argument that an FTT needs to be global to work is disingenuous. And there is clear evidence that this is not the case. For example, the UK’s tax on share transactions (the so-called “Stamp Duty”) raises more than £3billion for the finance ministry each year without a significant loss of business from the UK.
In fact, as the International Monetary Fund has shown, more than 40 countries have unilateral FTTs, including South Korea, India, US, South Africa and Brazil, as well as ten EU member states. The success of these existing taxes exposes the false claims of some in the financial sector that suggest an FTT that is not global won’t work or will lead to mass exodus of bankers. The IMF has said that FTTs “Do not automatically drive out financial activity to an unacceptable extent.”
As the Financial Times has acknowledged, Sweden’s failed attempt at an FTT, often cited by critics, was due to poor design rather than the principle of taxing financial transactions. And as the many other successful taxes show, Sweden is the exception not the rule. In fact, a well designed FTT can significantly reduce the risk of business relocation. The so called “residence principle” proposed by the European Commission makes avoidance harder, as it does not matter where the transactions take place, but who is involved. Risks can be further reduced if the “emission principle” (where the assets are registered, “the Stamp Duty model”) is applied, an option the EC is looking at. With this model, regardless of who or where the transaction takes place (in Europe or abroad), if you want to buy the financial product, you must pay the tax.
> > An FTT will negatively impact on growth and jobs
The biggest threat to long term growth is not an FTT, but an out of control financial sector. For example, the Bank of England found that the cost of the financial crisis to the UK economy over time will be at least £1.8 trillion and could be as much as £7.4 trillion. Even the lower figure is equivalent to more than a year’s economic output.
The European Commission’s assessment of the impact of an FTT projects a worst-possible case scenario of a 1.76% reduction in growth across the EU, spread over 10 years. If the FTT was designed in the way the rest of the document suggests, they conclude that a much lower figure is likely – perhaps as little as 0.53%. Tax Commissioner Šemeta has just recognised that the EC’s assessment was inaccurate and that the impact on growth would be even lower.
The EC’s assessment fails to take into account the fact that the money raised from an FTT could be invested in measures that would actually have a positive impact on the economy in Europe – poverty reduction, jobs and infrastructure – as well as invested in tackling poverty abroad and climate change. Lord Nicholas Stern stressed that inaction on climate change could cost as much as 5-20% of global GDP every year into the future.
A recent study by prominent economists Stephany Griffith-Jones and Avinash Persaud examines the positive impacts of FTTs, notably decreasing the probability of economic crises. They say that the impact of introducing an FTT on the level of GDP would in fact be positive, at least by 0.25%. The overall positive impact could be even higher. The smart and progressive use of FTT revenues would help encourage investment, create jobs and support sustained growth.
As stressed by Cambridge University’s Dr Ha-Joon Chang in the Financial Times in September, “if an FTT – ideally alongside increased regulation – helps stabilise markets by deflating the recent boom in high-frequency trading, then it will reduce risk and the cost of capital at the same time.” By reducing risk and the cost of capital at the same time, FTTs would help bolster positive growth.
Growth means more than protecting the profits of the privileged few in the financial sector. Casino banking may add numbers to GDP but it is of little value to the real economy and ordinary people’s lives. Lord Turner, Chair of the UK financial services authority, has described much of it as “socially useless”.
Austerity will not be enough to bring Europe and the world out of the crisis. Alongside finding the revenues to fill the deficit, governments also need to put in place measures that boost growth and employment. Where they get these funds from and which tax they choose is a matter of political choice. As stressed by the IMF, the FTT is likely to be “highly progressive”. The customers of organisations carrying out the majority of trades in assets such as bonds and derivatives are high net worth individuals and financial institutions so the FTT would fall on the richest segments of our economy and society. This is in complete contrast to VAT, which falls disproportionately on the poorest people.
> > FTTs will hit savings, pensions or small businesses
Firstly, in Europe, the vast majority of pensions actually rely on public transfers -not pension funds- which will be unaffected by the FTT because they do not require transactions in financial markets.
In general though, FTT’s tax rate is set extremely low (an average rate of just 0.05%) precisely to avoid having an impact on pensions and savings – activities that traditionally involve few transactions. The tax is designed to hit high frequency casino trading which is a completely distinct area of banking and contributes to financial instability, as was seen in the flash crash of 2010.
The FTT is likely to have an impact on investment strategies and the behaviour of pension funds, but the overall impact will not be negative for most pension funds. Indeed, by encouraging pension funds and savers to pursue long-term rather than short-term investment, an FTT is likely to have a broader economic benefit.
> > An FTT is a Brussels tax grab designed to fill EU coffers
It doesn’t have to be and it shouldn’t be. Both France and Germany are against using the revenue for the EU budget. Even the EC is open to discussing where the money should go; it proposed 2/3 for the EU budget and 1/3 for national budgets. Thus, revenue is most likely to go to national governments budgets.
A significant part of the proceeds should be used to fight poverty and climate change. The consequences of the financial crisis have been serious in Europe but they have been even worse in developing countries. The financial crisis has left a $65 billion gap in poor country budgets and the World Bank estimates that globally an additional 64 million people have been forced to live on less than $1.25 a day. Foreign aid is suffering its biggest fall in 15 years, exports, migrant remittances are down and, in the meantime, climate change is putting millions of people at risk of hunger and homelessness.
It is only fair that an FTT redistributes some of the money from those who caused the financial and climate crises to those who had the least to do with it but are suffering its effects the most.
Oxfam International EU Advocacy