A European Financial Transactions Tax - A Cacotopian Dream?

Author:Mr Joe Duffy, Aidan Fahy, Shane Hogan, Emer Hunt, Anthony Walsh, John Kelly, Gerry Thornton, Greg Lockhart, Catherine Galvin, Alan Connell, Liam Quirke, Mark O'Sullivan and Turlough Galvin
Profession:Matheson Ormsby Prentice

There has been renewed discussion about a European financial transactions tax (FTT) during bilateral Franco-German meetings on the difficulties facing the eurozone. In July, German Chancellor Angela Merkel and French Prime Minister Nicolas Sarkozy instructed officials to prepare a detailed proposal by September. The instruction comes on the back of proposals outlined in the European Commission's budget proposals for the period 2014-2020, published in June of this year.

What is a FTT?

A FTT (often incorrectly referred to as a Tobin Tax after the economist James Tobin who first proposed in the 1970s a tax on foreign exchange transactions only) has long been viewed in some quarters as a way to enhance the efficiency and stability of financial markets and reduce their volatility. Proponents also see it as delivering a significant contribution to the public purse by financial institutions. Calls for such a tax have increased in frequency in direct proportion to the amount of financial support received by financial institutions during the current economic crisis.

Ahead of last year's G-20 summit in Toronto, the European Council put forward the view that "the EU should lead efforts to set a global approach for introducing systems for levies and taxes on financial institutions with a view to maintaining a world-wide level playing field". It was agreed that there was a need for financial institutions to contribute in a fair and substantial way towards the cost of the assistance they had received. However, a consensus was not reached that the imposition of a FTT was the best way forward.

The European Commission published its budget plans for the period 2014-2020 in June of this year. Amongst the proposals contained in the budget plans was the imposition of a FTT, which the Commission hopes will recoup up to EUR€50 billion over the seven year period, funding one third of the Commission's overall budget. Although short on detail, the proposal gives a broad outline of how such a tax would work. The Commission proposal envisages the imposition of a levy of 0.1% on the value of transactions involving stocks and bonds and a levy of 0.01% on derivative transactions.

Reaction to the proposals

Academic opinion in relation to a FTT is mixed. Noting that the rationale for imposing such taxes has been the reduction of volatility in financial markets, empirical evidence has often shown that, far from reducing volatility in financial markets, the imposition of a...

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