Blog Post

The financial transaction tax: please consider the alternatives.

Last Tuesday the European ministers of finance asked the Danish presidency to consider alternatives to the financial transaction tax (FTT). The compromise Europe may be heading for might be a stamp duty along the lines of the current UK stamp duty. This taxes only share trading (presumably at a higher rate) and no other spot and derivatives trading Indeed, the example of the UK stamp duty, at a rate of 0.5%, shows that collection of such a tax can be very cost efficient, while the revenue has remained fairly stable over the years.

By: Date: March 16, 2012 Topic: Banking and capital markets

Last Tuesday the European ministers of finance asked the Danish presidency to consider alternatives to the financial transaction tax (FTT). The compromise Europe may be heading for might be a stamp duty along the lines of the current UK stamp duty. This taxes only share trading (presumably at a higher rate) and no other spot and derivatives trading Indeed, the example of the UK stamp duty, at a rate of 0.5%, shows that collection of such a tax can be very cost efficient, while the revenue has remained fairly stable over the years.

However, three crucial points still remain: will a tax increase stability in the financial sector, does it distort investment decision in the real economy, and do better alternatives exist? The commission has done an admirable job in its impact assessment of the FTT. It rightly concludes that the tax is not directly aimed at correcting the underlying causes of the financial crisis; it would not have prevented the 2007-2008 financial crisis. Nevertheless, a tax may still reduce volatility in financial markets, which some interpret as increasing stability. A survey of the empirical and theoretical literature shows, however, that a financial transaction tax can either increase or reduce volatility. A best guess is therefore that it will not affect volatility. The same goes for a stamp duty.

Then there is the question of the macroeconomic costs, where the core driver is the effect of an FTT on firms’ cost of capital. Estimating this effect is difficult because it involves a multitude of parameters. In its initial assessment, the commission concluded that the tax would reduce GDP by 0.5 to 1.8 percent. A back-of-the-envelope calculation yields comparable results. In an update to their initial assessment the commission has revised their initial estimate downward to 0.2 to 0.3 percent. Restriction to a stamp duty on shares will lead to further downward adjustment of these figures. The lesson to be learnt here is not that these costs will be small, but that they are subject to considerable uncertainty.

This leaves the issue of alternatives options for taxation, which the Danish presidency has been asked to look into. A transaction tax by its nature taxes intermediate transactions, which distorts production decisions. Taxing final products would be more efficient. The Danish presidency’s assessment should therefore look into some form of a Financial Activities Tax as well as abolishing the current VAT-exemption of many financial services.

A FAT, as proposed by the IMF, aims to tax financial sector revenue plus wages as a proxy for added value. It could raise significant revenue and be better targeted at reducing systemic risk in the financial sector. The VAT-exemption is often justified on the grounds that many financial services are margin priced and therefore value added is hard to measure. Whether this is a valid argument is subject to debate. Both alternatives have their drawbacks as well, but a serious effort to compare their merits relative to a transaction tax should be made.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Improving understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

Blog Post

Now is not the time to confiscate Russia’s central bank reserves

The idea of confiscating the Bank of Russia’s frozen reserves is attractive to some, but at this stage in the Ukraine conflict confiscation would be counterproductive and likely illegal.

By: Joshua Kirschenbaum and Nicolas Véron Topic: Banking and capital markets, Global economy and trade Date: May 16, 2022
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article More by this author
 

Blog Post

Owning up to sustainability risks: the EU should champion international standards

To keep European Union capital markets open and integrated, new international standards should be reflected in future European law and accounting practice to provide further incentives for a reallocation of capital, reflecting in particular climate risks.

By: Alexander Lehmann Topic: Banking and capital markets, Green economy Date: April 26, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More by this author
 

Podcast

Podcast

War in Ukraine: sanctions on Russia two months in

A further look into sanctions on Russia and the implications for the global financial system.

By: The Sound of Economics Topic: Banking and capital markets, European governance Date: April 22, 2022
Read article
 

Blog Post

The European Union should sanction Sberbank and other Russian banks

Sanctions on Sberbank and most other Russian banks should be imposed by the EU, without delay and at no major cost to either itself or like-minded countries, while it ponders an oil and gas ban.

By: Joshua Kirschenbaum and Nicolas Véron Topic: Banking and capital markets, Global economy and trade Date: April 15, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Load more posts