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Economic Consultants Slam Commission's FTT Plans

21 May 2013   (0 Comments)
Posted by: Author: Ulrika Lomas
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Source: Ulrika Lomas (, Brussels)

The European Commission's proposed Tobin tax will make some financial transactions uneconomic and deter others with real financial value, according to a new report.

Commissioned by the Association for Financial Markets in Europe, economic consultants Oxera have produced a report critically reviewing the Commission's assessment of policy options for, and the impacts of, a financial transactions tax (FTT).

Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia are progressing with an FTT along the lines of "enhanced cooperation." This procedure, which enables those states wishing to work more closely together to do so, was authorized by the European Council of Economic and Financial Affairs (Ecofin) at the start of the year. The Commission published its estimations in a staff working document (SWD) in February.

The tax is intended to apply from January, 2014 at a rate of 0.1 percent on all share and bond transactions, and at 0.01 percent on derivatives transactions.

Examining the Commission's SWD, Oxera came to five main conclusions. It found that the result of taxing immediate transactions would be either to multiply the costs for end-users, and/or to reduce market making and ultimately liquidity. Neither of these outcomes is judged to be in the interests of end-users. Similarly, taxing secondary market transactions in government debt is seen as ill-advised. Such action would increase sovereign borrowing costs and hit market liquidity to a greater extent than envisioned by the Commission, and is not deemed consistent with the objective of lowering the burden of sovereign debt costs.

In the case of derivatives, some hedging activities will feel an FTT's impact more than others, in turn deterring some forms of prudent risk management. According to Oxera, "this means that the Commission's assumption that the loss of derivatives trading will have no wider economic impact is less tenable." Returns on pension products would be slashed if transactions undertaken by pension funds were taxed in conjunction with immediate transactions, affecting those saving for their retirement.

Finally, Oxera concluded that many valuable transactions would be rendered uneconomic were repos to be taxed. Inefficiency would be introduced into the repo market itself, with additional costs expected to fall on end-users.

More generally, Oxera found that an FTT would be an inefficient way to raise public funds, pointing to the Commission's own admission that to raise EUR1 (USD1.28) of FTT revenue, the European economy would have to sacrifice EUR2 of its gross domestic product. Specifically, the so-called "EU11" would lose some 80 percent of the EUR35bn estimated revenue owing to the FTT's likely negative impact on other tax sources.


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