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Financial transactions tax
Practical Law UK Legal Update 9-502-2139 (Approx. 3 pages)
Financial transactions tax
by Simon Lovegrove, Norton Rose LLP
| Published on 04 May 2010 |
This article is part of the PLC Global Finance April 2010 e-mail update for the United Kingdom.
Speedread
Financial transactions taxes are under the political and public spotlight because they are perceived as the potential area where the financial sector can make its contribution towards the financing of bailout costs caused by the financial crisis. As the idea increasingly appears to be gaining traction, this article examines the debate.
Financial transactions taxes are under the political and public spotlight because they are perceived as the potential area where the financial sector can make its contribution towards the financing of bailout costs caused by the financial crisis.
The idea of a financial transactions tax is derived from the 1978 proposal of James Tobin for an internationally uniform tax on all spot conversions of one currency into another. Tobin's reasoning was that the introduction of a small tax on currency transactions would increase the effectiveness of national monetary policy and would reduce unnecessary or harmful speculation by "throwing sand into the wheels of foreign exchange markets". However, Tobin's idea is quite different from the goals of a general financial transactions tax which is being debated at the moment.
The European debate on financial transactions taxes is gaining momentum. In October last year the European Council invited the European Commission to examine innovative financing at a global level and this examination included a review of financial transactions taxes. In March 2010, the European Parliament adopted a resolution requesting the Commission to carry out an assessment of a financial transactions tax. In April 2010, the Commission published a staff working paper which looked at innovative financing at a global level which included a discussion of financial transactions taxes.
In the staff working paper the term "financial transactions tax" or "FTT" is used as a general concept encompassing, but not limited to, a pure currency transactions tax. The Commission's thinking is that the term better reflects the current, more general debate on the possible use of financial transactions taxes, which can also be applied to other financial transactions such as equities, bonds and derivatives.
Would a financial transaction tax be worthwhile? In short, the answer is "Probably". The Austrian Institute of Economic Research previously estimated potential global revenue of a general FTT for 2006. The Austrian figures suggested that a general FTT rate of 0.1% could raise between US$410 (EUR327) billion and US$1,060 (EUR845) billion in absolute terms.
But an FTT does have problems. For example:
- The general scope of the FTT would have to be properly defined. In particular, many financial transactions are not limited to trades in securities, currencies or derivatives.
- Clear conditions for the use of collected revenues would need to be established and understood by countries.
- Would there need to be international agreement for an FTT? What would happen if the EU agreed to introduce such a tax but the US did not?
- Most revenues from the FTT would be collected in countries with significant financial centres. If all countries introduce the FTT and carry some of its burden, the economic benefit of the tax in terms of revenue collected might be located only in a few countries with large financial centres. This then raises the question of who should collect the tax and whether or not an agreement to share the revenues is needed.
- Would the financial sector actually carry the economic burden of the FTT? The tax could fall on traders, stock exchanges, companies, governments or on final consumers via higher prices for financial services.
The debate on FTT is not just restricted to Europe; a wider international debate is currently in progress. Last September the G20 called on the IMF to prepare a "range of options" for "how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions" to counteract financial sector crisis. The IMF's final report will be presented to G20 leaders in June, with a preliminary version to be discussed at the G20 finance ministers' meeting in April.