Following a barrage of criticism for its initial proposal, tabled in the autumn, the Commission is now desperately trying to brush up on its figures and presentation, to counter what it claims to be a series of “distortions” about the nature and impact of the tax. The aim is clearly to make the proposal more attractive in places like the UK and Sweden (good luck!). In this vein, EU Budget Commissioner Janusz Lewandoski gave a lengthy presentation in the European Parliament yesterday highlighting the potential ‘savings’ which EU countries could make on their contributions to the EU budget if an FTT was introduced and then used to fund part of the EU budget.
This would have been a nice try had it not been for one small issue: the Commission’s polished figures and arguments are completely contradictory and illusory. In fact, Lewandowski’s presentation might as well have been about a proposal for a new tax on unicorns (we can already see the tabloid headlines).
The Commission’s “improved” case for the FTT, rests on one policy proposal and one assumption (p.10 in the presentation):
- Policy: All countries will contribute 2/3 of the nationally-collected revenue from an FTT to the EU budget, which will reduce the contribution for some member statesThe Commission has even produced a graph showing how contributions from member states would change were an FTT used to fund the EU budget. Under this scenario, says the Commission, the FTT would be a ‘win-win’ for the UK because the Government would suddenly have a new stream of revenue – a third of which the Commission would kindly allow the UK could keep for itself, while the rest would fund the EU budget, replacing the current contribution.
- Assumption: “Taxable transaction volume develops in proportion to nominal GNI” – this means that the potential revenue from the FTT (essentially the size of a countries’ financial service sector) is directly proportional to its nominal GNI
It’s very difficult to take this seriously. Everyone knows that the assumption that countries’ financial services sectors are proportional to their GNI is fundamentally untrue. The UK financial services sector is huge and proportionately much bigger than the financial services sector in other EU countries. This also means that the actual policy proposal makes no sense whatsoever.
In the real world, the UK accounts for around 72% of all EU financial transactions. Any budget contributions from an EU wide FTT would need a complex burden sharing arrangement to even out the contributions across the EU – something which is just assumed away under this proposal but still remains a very real obstacle. If the assumption doesn’t hold then contributing 2/3 of the UK FTT revenues to the EU budget would probably radically increase the UK's EU budget contributions (hence the need for some form of burden sharing).
So fundamentally the figures and the graphical representation, although pretty, are totally incorrect.
These assumptions are also incompatible with the figures which were originally drawn from the Commission’s impact assessment on the proposed EU FTT. These figures were based on volumes of financial activity accurately measured around Europe, and therefore accepted that the UK is home to Europe’s largest financial centre.
The original European Commission proposal also accepted that 90% of derivatives transactions, along with many other financial services, could be displaced outside the EU as a result of a European FTT. Given the UK’s share of this market it would hit the economy and tax intake incredibly hard. The reality is that the cost of an EU-wide FTT to the UK economy as a whole would be huge, (see here, here and here for a full discussion of the FTT drawbacks for the UK and Europe).
There are plenty of other steps which need to be taken to improve regulation and oversight of financial services in the EU, not least on-going issues with bank capital levels. The Commission would be far better spending its time and taxpayers’ cash on these productive measures rather than defending Kafkaesque proposals with little chance of working in practice or being accepted.
At some point, you just have to admit defeat.