Compared to the frequently glacial pace of European bureaucracy, the Financial Transaction Tax (FTT) has moved through EU decision-making processes at a surprisingly high speed. When it became clear in 2012 that EU member states had insurmountable divergences of opinion on the question whether to introduce a financial transaction tax, the most fervent members decided to speed up things by going down the (nearly) untested road of “enhanced cooperation procedure”.
One of the big problems for everyone outside of the 11 enhanced cooperation countries is that the difference between being “in” or “out” is severely reduced by the extraterritorial effects of the FTT induced through a combination of the issuance principle and the residency principle. To put it crudely, the tax has to be paid, by any financial institution (situated in a country “in”, but also in a country “out”) on any transaction on securities issued within the territory of the 11 member states or anytime a financial institution within the 11 countries is involved in any manner in the transaction (chain of payments, settlement, etc.). It is a very large net indeed.
The European Commission and member states supporting the introduction of an FTT claim that such a tax is needed because “financial institutions do not make a fair and substantial contribution to covering the cost of the recent crisis”. Beyond the fact that such a statement is false and intellectually dishonest, it is also a complete delusion to believe that a tax on financial transactions will be paid by anyone other than citizens. As with any other tax on consumption, the person collecting the tax is not the same person as the one who pays for it. Thus, the company importing spirits is the one collecting duties on alcohol, but it is the end consumer who actually pays the duty included in the price of his bottle of whisky. The same goes for a tax on securities or any other financial product. The administrative work and cost for applying the tax is borne by the company collecting the tax. For end consumers, the tax is only noticeable in the increased price of the financial product.
Governments are under pressure to balance their budgets. As there seems to be a certain consensus to increase revenues through taxes and not by reducing spending, it is thus ultimately irrelevant whether citizens are hit by a tax that is levied indirectly (through an FTT) or perceived directly from them. As a common effort is required, the tax should have a very large scope, but hit everyone in proportion to his contribution capacity.
Viewed from this angle, however, the draft directive raises some legitimate questions. Why, for instance, are financial instruments sold to or redeemed by retail investors (including retail investment funds) included in the scope of application of the proposed tax? And why are financial institutions and other intermediaries charged with the recovery of the tax, even if their country (the country where they are established) has opted to not apply the tax? Finally, are financial institutions recovering the tax - for governments, but from the citizen - not entrusted with sovereign powers through this new law and, consequently, should they not be compensated for their tax collecting services? The latter question sums up the absurdity of a tax “only” applied by 11 member states that nevertheless indirectly applies to everyone else, and that is supposed to make the financial sector “pay” for the crisis, but will end up squeezing citizens and, particularly, retail investors.
When all is said and done, member states will have to choose between generating more revenues while killing off the single market in financial services or getting less revenues while safeguarding the single market.
Editorial by Rüdiger Jung, Member of the Management Board (ABBL), published in Luxembourg Banking Quarterly - Issue 1/2013