Thursday, June 16, 2016

The EU's Financial Transaction Tax will hurt the City.

As Europe’s, and arguable the world’s, leading centre for Financial Services, it is dismaying that at almost every opportunity the UK’s Financial Services industry is targeted by those EU states wishing to put a check on its influence. Many of these measures are ill-thought through and are political decisions not financial ones, whether they be short selling bans, bonus caps, and the huge amount of EU-sourced regulation which stifles innovation and competitiveness as opposed to enhancing it. Another such measure is the Financial Services Transaction Tax (FTT) whose implementation in some form looks more and more certain.

This controversial measure proposes to charge financial institutions 0.1% on trades of shares and bonds and 0.01% across derivative contracts. The idea initially was to raise funds to insure against any future bail outs whilst reducing the likelihood of future systemic crises. But the FTT is the embodiment of everything the EU pretends to be whilst actually achieving the opposite. Firstly, it makes EU Financial Services less competitive in a global industry. Financial transactions take place all across the world, and so the FTT is simply making the EU less attractive. Secondly, instead of being a positive tax designed to protect the EU and create a capital buffer, some forecasts (EU forecasts no less) show that the FTT would actually see volumes reduce quite dramatically (up to 90% for derivative transactions) and could even dent GDP growth. Unlike the Laffer Curve which shows income tax as a positive tax up to a point then a negative, a FTT would have very little upside and would be entirely a negative tax. When Sweden introduced a tax similar to the FTT in the 1980s, it destroyed its options market since most of the relevant business went to – guess where? – London. So the taxes were soon removed. The EU is simply not learning the lessons of recent history – that FTT would drive business offshore and to other continents. In any event in the UK we already charge a Stamp Duty Reserve Tax on financial transactions covered by the FTT and so this is simply taking another slice from the pie by the authorities.

The EU is supposedly designed for the mutual benefit of every member state, however increasingly often the UK’s financial services industry is being targeted whilst equally important national industries are protected, in the way that the CAP safeguards French agriculture. Yet the scope of the FTT is designed so that it would actually effect non-signed up countries, such as the UK. It does not matter where a transaction takes place in the world, simply whether one of the parties is resident in the FTT-zone. Also any financial instrument issued in a FTT-zone country will be taxed, wherever and by whomever they are traded. The idea of taxing transactions goes against one of the foundations of the EU – the free movement of capital. It really does seem like some EU industries are more equal than others.

It is yet another example of an EU that is sceptical of Anglo-Saxon capitalism.

Who would really suffer from its introduction? The answer, as so often in EU politics, is both counterintuitive and perverse. It’s the EU’s whole financial services industry and ‘the people’ who they are trying to protect from future bail-outs. People’s pensions will become more costly at a time that low interest rates are already hurting them. The very idea that the FTT will help reduce the likelihood of another crisis is laughable – the last crisis was triggered by a US housing market crash and irresponsible lending by Banks.

And who will benefit? Well part of the funds raised have been earmarked for things like climate aid, and so the tax has already been exposed as less of a ‘banking buffer’ and simply another route for the EU to raise funds for its own measures. More sinisterly this would be the first EU-wide, harmonised tax measure and it’s clear that this is the direction of travel  - as it must be to save the Eurozone – and the Eurocrats have already got their eyes on the UK’s lower corporate and personal tax rates.

As things stand, the FTT has struggled to get unanimous support amongst the 28 members of EU. The EU Commission initially started thinking about in 2010 but struggled early on to gain support for it, so it turned to the use of enhanced co-operation to implement the tax in the states which wished to participate. As yet only 10 states actually have actually signed up for an enhanced-cooperation FTT, but including France, Germany and Belgium. Eight nations are opposed to it: Sweden, having learnt from their mistakes of the past, being one and the UK another. Another 10 countries are on the fence, although have expressed support if all 28 member states are forced to participate.

It is thought that the tax will start to be collected in 2017. However, the UK would launch a legal challenge against a tax that affected its industry. The prospect does not look good, though, as an initial legal challenge was blocked in April 2014 by the ECJ.

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