EU taxes: distracting, impractical and asymmetrical

The dual pressures of the eurozone crisis and looming negotiations on the new long term EU budget have given a fresh impetus to Brussels policymakers' long-held desire for greater EU powers, direct or indirect, over EU taxation.

Chancellor Merkel and President Sarkozy have put EU taxes firmly back on the agenda this week, with their public backing of the introduction of a financial transaction tax (FTT) at the EU-level. This comes hot on the heels of the European Commission's proposals to fund the 2014-2020 budget with a new EU VAT and an EU FTT.

In a new briefing published today we explain why ten of the potential options for EU taxes, including those proposed by Merkel, Sarkozy and the Commission, will not work. We look beyond the (incredibly important) arguments regarding national sovereignty and democratic accountability to illustrate that all ten options recently considered for EU taxation also fail on economic and practical grounds.

We also estimate that the potential impact of an EU FTT could be to cost financial markets across the EU between €24.3 billion and €80.9 billion and across the UK between €17.5 billion and €58.2 billion (£15bn and £49.9bn). A large part of these costs will be passed on to consumers (our figures are based on the Commission’s proposed rate of 0.1% for bonds and shares and 0.01% for derivatives and without a burden-sharing system; the range accounts for uncertainties regarding the degree of relocation and evasion following the introduction of an FTT).

We're clearly talking about more than small change here and when it comes to potentially using the FTT to fund the EU budget a whole new can of worms is opened. The Commission, and the European Parliament which is also in favour of an FTT, has failed to explain what mechanism, if any, will be used to make an EU FTT equitable, since, as things stand, the UK is home to roughly 72% of financial transactions across the EU. Such a mechanism would undoubtedly be hugely complex, making the EU budget only more difficult for taxpayers to understand.

This is not to mention that, should the EU go it alone with an FTT without global agreement, firms would simply relocate away from the EU altogether - a warning made by Swedish PM Fredrik Reinfeldt, who was talking from experience.

The nine other options we consider suffer similar problems regarding disproportionate effects (either on particular member states, societal groups or businesses), and increasing the complexity of the budget rather than reducing it.

The real crux of the matter is that the debate surrounding EU taxes is simply a distraction from tackling the real issues. For Merkel and Sarkozy, it is resolving the eurozone debt and banking crisis, for the Commission it is fundamentally reforming an EU budget that is no longer fit for purpose - ultimately, the complexity and lack of transparency regarding the budget has far more to do with its size and the logic underpinning the EU’s spending programmes than how it is financed.

But, unfortunately, this doesn't mean the subject of EU taxes will go away any time soon.