Slapping 0.1% on all financial transactions (and 0.01% on derivatives) seems like an easy win for governments, given the enormous size of the market. But in practice when you tax something as mobile as money it will simply flee to a lighter jurisdiction, as the Swedes discovered when they tried the same trick in the late 1980s.
Unsurprisingly Sweden and many other EU countries, including the UK, refused to agree to the FTT. Eleven EU states are going ahead regardless, using a new mechanism called ‘enhanced co-operation’ which allows a group of EU states to integrate further without the others agreeing.
‘Enhanced co-operation’, introduced by the Lisbon Treaty, opens up all sorts of possibilities which the UK could eventually exploit to its advantage (what’s the point of the EU if states can just co-operate in ad hoc groups anyway?). But that’s another story. For the time being the UK government is challenging the FTT in the courts and even the French are having cold feet. Financial transactions include gilt issuance and other government financing such as regional development loans, so the FTT involves finance ministries effectively taxing themselves – something even President Hollande baulks at.
What’s intriguing is that the EU’s own economic number crunching reveals how damaging the tax will be. New Direction has just brought out a report analysing the Commission’s own data as it relates to the FTT.
Red Tape Watch is a new series designed to get behind the obfuscatory numbers produced by the EU in defence of their endless stream of regulations. Typically, the European Commission publishes ‘impact assessments’ which apply an economically benign whitewash to any damage the red tape in question might do.
Their FTT analysis is a case in point. The Commission admits that the tax is a third best option that will take €34 billion out of the economy, causing capital flight and impacting GDP to the tune of 0.2-0.4%. But it then makes all sorts of heroic assumptions about how the damage will be more than compensated for – by efficient government spending for example, or debt reduction.
But if money is more efficiently spent by government than the private sector, we may as well all revert to Communism. And in the great debate about deficit reduction neither side thinks that raising taxes is the way to go.
The Commission even argues that without the FTT we risk a general strike costing – you guessed it – 0.2% of GDP. So here’s a novel way to approach policy making: raising taxes avoids strikes, and so pays for itself. Whippee! Even Gordon Brown didn’t think of that one.
If you run the €34 billion figure through the Commission’s own Eurostat economic models you arrive at a more sober truth. Taking such a sum would have knock-on effects throughout the European economy causing an estimated 641,000 job losses, including tens of thousands among suppliers in countries like the UK which are not even implementing the tax.
These numbers must surely mean the FTT is out for the count.
|Other EU27 (mostly UK)|
Tom Miers is Director of New Direction, the Foundation for European Reform.