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SEB-report: EU financial transactions tax unlikely to pass
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SEB-report: EU financial transactions tax unlikely to pass

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The European Commission will present a proposal for a Tobin tax on financial transactions this autumn. Implementation of this tax is unlikely as both Sweden and the UK oppose it. It would be easier to …

The European Commission will present a proposal for a Tobin tax on financial transactions this autumn. Implementation of this tax is unlikely as both Sweden and the UK oppose it. It would be easier to find support for a stability levy, writes SEB economist Andreas Johnson in a note published Wednesday.

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  • 1. WEDNESDAYEU Tobin tax unlikely to pass 6 JULY 2011The European Commission will present a proposal the autumn of this year with the aim of introducing it no later than 1 January 2018.for a Tobin tax on financial transactions thisautumn. Its most important aim appears to be to So far, details are sketchy, probably to ensure thegenerate tax revenue although legislators also proposal is not rejected out of hand. However, the resultsseek to reduce market volatility and activities by of the underlying analysis are presented in Europeanfinancial institutions characterised by excessive Commission (2011).risk. However, experience from previous attemptsto introduce financial transaction taxes is poor; The broad motivation for introducing a tax on financial transactions is to require the sector to contribute more toactual tax-income raised has been less than the costs of stabilising the financial system. The tax hasexpected while the measurable effect on market three main objectives; to raise revenue, to reducevolatility has been unclear. Furthermore, actual “overly risky” activities by financial institutions andimplementation of a European Union Tobin tax is to avoid fragmentation of the internal market forunlikely as both Sweden and the UK oppose it. It financial services which could result fromwould be easier to find support for a stability levy. uncoordinated national taxes. It is intended that the initiative represent an initial step towards the application of a financial transaction tax on a global level and that itTHE ORIGINAL TOBIN TAX. The original “Tobin tax” was would “allow the EU to lead by example”.suggested by the American economist James Tobin in1972, shortly after the break-up of the Bretton Woods As far as the size of the tax rate is concerned, specificsystem, and was later presented in more detail in Tobin details will be introduced together with the concrete(1978); see reference list. Tobin suggested a new system legislative proposal this autumn. However, it has beenfor international currency stability, of which an stated that “a very low tax rate would be imposed”international charge on foreign-exchange transactions and that legislation will differentiate between differentwas a key component. The objective was to reduce groups of instruments, possibly 0.1 per cent for bondsexchange rate volatility by levying a small tax on all spot and shares and 0.01 per cent for derivatives products.conversions of one currency into another, penalising very Revenue generated, estimated by the EU Commission atshort-term investments. The tax was intended to reduce over EUR 30bn per annum, should flow into the EUharmful speculation by “throwing sand into the budget.wheels of foreign exchange markets”. Tobin had noview on how the proceeds of such a tax should be used A TOBIN TAX COULD HAVE HARMFUL EFFECTS. Theas its aim was not to create tax revenue but to dampen underlying assumption justifying a Tobin tax is thatexchange rate fluctuations. speculation in financial markets is inherently negative. This is debateable; while speculation can result in theThe term “Tobin tax” sometimes refers to Tobin’s original development of harmful asset bubbles it can also havesuggestion of a specific currency transaction tax and several advantages. Speculation can help markets tosometimes to a more general type of tax on all financial work better by stimulating the process of price discoverytransactions. The present European Commission and improving liquidity. Furthermore, it is extremelyproposal is of the latter kind. difficult to distinguish between speculative and non- speculative transactions.THE EUROPEAN COMMISSION PROPOSES A TOBINTAX. The European Commission has stated that it will Irrespective of the utility or otherwise of speculation,present a proposal for an EU financial transaction tax in there are several problems connected with TobinThis report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document 1are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted forany direct or consequential loss resulting from reliance on this document Changes may be made to opinions or information contained herein without notice. Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in theUS. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct ofinvestment business in the UK.
  • 2. Economic Insightstaxes. The most fundamental is that the introduction voiced criticism, stating that a financial transaction taxof a tax on financial transactions risks relocating would be harmful for the financial sector in the EU at athose transactions to other jurisdictions. The process time when the sector is in need of increased activity.of globalisation has integrated financial markets andrelocation is much more of a problem now than during Since EU member states wield veto powers on most taxthe 1970s. To be effective such a tax would have to take issues it seems unlikely that a tax on financialthe form of an internationally agreed uniform tax (as transactions will eventually be implemented.suggested by Tobin). Another problem is that a Tobin tax Instead, it is more likely that new taxation of the financialcould eliminate day-to-day low-margin trading while still sector will take the form of a stability levy such as thatfailing to prevent speculation where expected profit used in Sweden. Within such a system a fee is levied onwidely exceeds the tax payable. The tax also threatens to certain balance sheet positions (rather than on moreincrease the cost of capital for business. mobile financial market transactions) in order to reduce leverage. The fee payable could limit excessive risk-Empirical evidence that the introduction of a Tobin tax taking but risk driving activity into other parts of thecould reduce market volatility is weak at best. Most financial sector. A stability levy has already beenempirical studies have failed to find a statistically discussed in underlying analysis published by thesignificant causal link between increases in European Commission. While it would be easier to findtransaction costs and reductions in volatility. Some support for this kind of system among member states, astudies have even found that a Tobin-style tax may stability levy does not form part of the current proposal.actually increase volatility due to a reduction in thenumber of transactions and liquidity in financial markets. References European Commission (2011): “Financing the EU Budget:SWEDEN’S EXPERIENCE IN IMPLEMENTING A TOBIN- Report on the Operation of the Own Resources System”,STYLE TAX IS INSTRUCTIVE. Several countries have Commission Staff Working Paper, SEC (2011) 876 final.experience of financial transaction taxes based onvarious designs. Sweden is one such example; between Tobin, J. (1978): “A Proposal for International Monetary1984 and 1991 a general form of financial transaction tax Reform”. Eastern Economic Journal, 4(3-4), July/October,was implemented beginning with introduction of a tax on pp. 153-159.the purchase and sale of equities, followed later by taxeson fixed-income securities. The amount of revenues Andreas Johnsongenerated was disappointing. As transactions were SEB Economic Researchdriven abroad taxable trading volumes fell sharply and + 46 73 523 77 25actual tax revenues were less than 5 per cent of the andreas.johnson@seb.seexpected amount. The impact on fixed-income securitiestrading was dramatic; the volume of bond trading fell bymore than 80 per cent and the options trading marketdisappeared. By the end of 1991 these taxes had beenabolished completely and trading volumes returned. TheSwedish experience outlines one of the mainproblems with a Tobin tax; trading is driven abroadand the expected increase in tax revenue fails tomaterialise. Experiences differ but countries such asCanada and Switzerland have also experiencedrelocation of trading.ACTUAL IMPLEMENTATION IS UNLIKELY. Suggestionsfor introducing Tobin taxes have resurfaced now andthen during the last twenty years and the financial crisishas served to strengthen its advocates. However,passing legislation to tax financial transactions will bedifficult. A Tobin tax enjoys the support of the Frenchand German governments but Sweden has arguedstrongly against its introduction based on the argumentthat trading will be relocated. The UK is only prepared tosupport a transactions tax if it is agreed at global level.The president of the ECB, Jean-Claude Trichet, has also 2

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