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Thursday, February 21, 2013

E.U. Passes Financial Transactions Tax (FTT)

Out of a “desire to ensure that the financial sector fairly and substantially contributes to the costs of the crisis and that [the sector] is taxed in a fair way [relative to] other sectors for the future, to disincentivise excessively risky activities by financial institutions, [and] to complement regulatory measures aimed at avoiding future crises and to generate additional revenue for general budgets or specific policy purposes,” the Council of the European Union took a decision on 14 January 2013 to allow 11 states, including Belgium, France, Germany, and Italy, to act in a coordinated fashion with the Commission and each other in establishing and administrating a tax on financial transactions. That is to say, the tax is to be jointly administered by the Commission and the states, and both levels would share in the proceeds. A few states, most notably Britain and the Czech Republic, abstained in the voting.
Back in July 2012 at a European Council meeting, it was clear that the FTT would not find unanimous support, so eleven states were given the go-ahead six months later to proceed because the coordinated effort was deemed a “last resort.” Behind the permission was doubtless a sense (or a hope) that starting a tax regime as a shared competency for a limited number states would grow to encompass more states. The E.U. had progressed in just such a gradual process in the past, so the strategy of beginning a new tax regime with a few states is in keeping with the history of European integration and would be likely to result in future expansion to include every state or at least the vast majority. This is not to say that the coordinated FTT was not without its flaws. Fixing them could facilitate other states in picking it up.
First, the assumption that the financial sector rather than its customers would end up paying for the financial bailouts seems somewhat less tenable. In anything less than strong competition, firms will pass the tax onto their customers. It has by no means been established that the banks’ customers were culpable in the financial crisis of 2008.
Second, it is difficult to see how a tax of 0.01% for derivatives and 0.1% on every other financial transaction, including the purchase of stocks and bonds, would thwart risk-taking. It would seem that for such a goal derivatives, such as those based on mortgages that triggered the swaps that nearly brought down AIG in the U.S., would be taxed at a higher rather than lower rate than stocks and bonds.
Third, the inclusion of adding to the general budgets at both the federal and state level—the competency being shared—could be criticized as evincing “big government” above and beyond the particular objectives of the tax. In other words, the FTT would be on firmer ground were its proceeds exclusively oriented to the financial sector, whether in making up for the costs to the public in having bailed out some financial institutions in the wake of the financial crisis, to treat the sector fairly relative to others in terms of tax, or to fund future financial regulation.
In short, expanding state participation in exclusive or shared E.U. competencies is predicated on public policy being tightly wound around its particular objectives. If risky transactions are to be discouraged, the tax-rate differentials should not be shy in creating adequate monetary disincentives. Combined with going far enough in terms of the objectives, avoiding waste or “spillage” can make all the difference in terms of the efficacy of continued shifts of governmental sovereignty to the E.U. such that the federal system itself comes to enjoy a balance of power between the state governments and that of the Union.


European Commission, “Taxing Financial Transactions,” 14 February 2013.