Growth in UK economy to increase EU 'stealth tax'

It's that time of year again. Chancellor George Osborne has delivered his latest budget. The EU geeks that we are, we have one question in mind: what does it say about the UK's contributions to the EU budget?

Well, as ever, this is complicated because there are lots of ways of measuring these contributions. The table below shows the main figures and how they compare to the OBR's previous estimates in December 2013 (click to enlarge):

It shows that the UK's total net and gross contributions to the EU budget are now expected to be around £2.3bn and £1.7bn higher over the next six years than previously forecast. However, the impact of this on the OBR's figures for the Government's Total Managed Expenditure (TME) and Public Sector Net Borrowing (PSNB) as shown in the Budget is neutral or even slightly positive over the same period, compared to the December forecast.

One of the reasons for this is that the OBR effectively treats the contributions that the UK makes to the EU via a share of VAT receipts, customs duties and sugar levies as a direct "EU tax" and the money therefore doesn't show up in the national accounts. UK contributions are also affected by the complex rebate calculations and how much the UK receives from the budget.

As the UK economy is now growing faster than others in the EU, the overall UK contribution increases. But because the rebate is calculated on the basis of the UK's VAT contributions and the UK gets a refund on some of the customs duties it collects, that will help reduce direct contributions from the UK Government's budget and balance out this figure over the six years.

Relative to GDP the increase is tiny and the good news is that it's due to a faster growing economy.  Nevertheless, UK plc still ends up contributing more due to the growth in the 'EU's tax base'...

Finally a deal on the EU long-term budget?

On Wednesday, European Parliament President Martin Schulz wrote to Irish Deputy Prime Minister Eamon  Gilmore warning him that the latest compromise on the long term EU budget agreed by EU leaders in February would be rejected. Yesterday morning, however, a deal was struck between the two negotiating teams. So had member states suddenly given in to all MEPs’ demands?

Although not all the details are fully clear, it looks as though MEPs have not secured anything substantial above and beyond the compromise they rejected last week.

Retaining unspent funds and ‘flexibility’ – A decent win for MEPs; member states have agreed that rather than taking back unspent funds as before, these can be rolled over to next year’s budget – although a) in recent years there has not been much of a surplus and b) while unlimited unspent funds can be rolled over at the start of the seven year period, this is capped towards the end. There is also scope for moving some cash around between budgetary headings.

Topping up the 2013 annual budget by €11.2bn – A big win for MEPs who demanded payment in full of the additional €11.2bn requested by the Commission to retroactively top-up the 2013 budget (although this is less down to MEPs themselves and more down to the fact that annual budgets are decided under majority voting). So far €7.3bn has been committed despite the UK voting against. This leaves €3.9bn outstanding and Martin Schulz has already warned that if member states renege on this, after MEPs have approved the budget, they will hold hostage the 70 or so individual pieces of implementing legislation for the EU's long-term budget.

A mid-term review: It looks as though MEPs have secured their demand for a compulsory review mid-way through the seven year budget but crucially it seems all but certain that this will take place under unanimity, not majority voting as MEPs had demanded, a scenario which could potentially have seen the spending limits increased. Intriguingly, this could coincide with a UK referendum should David Cameron still be in Downing Street.

Direct EU budget taxes – A big defeat for MEPs who pushed for a complete overhaul of the “own resources” system which would have seen the introduction of direct EU taxes and the scrapping of the UK and other rebates. This issue is completely left off the Commission’s press release and at a press conference following the agreement, the parliament’s negotiator only mentioned further “debate” on this issue. This was a clear red line for member states.

Extra help for youth unemployment – MEPs have also secured an additional €2.5bn to help combat youth unemployment, although this will be reallocated from existing funds, so it is not new money. Member states will also be able to voluntary commit additional funds in this area if they chose to.

So, despite a huge amount of posturing, overall the threat to veto the agreement proved to be an empty one and many of the MEPs' key demands were unmet - as we predicted at the time. They will now get two votes on the long term budget – a non-binding one next week and then a binding one come September or October. A lot could still happen between now and then, especially if MEPs decide they want another stab at obtaining further concessions or if member states refuse to pay more money into this year’s budget.

Even though the UK would not have been in a bad position had the parliament vetoed the agreement, politically it is better for David Cameron to be able to point to a concrete cut (as has already been proposed for the 2014 budget) as this adds credibility to his argument that he is able to secure a better deal for the UK in Europe.

The 2014-2020 EU budget: The deal that never was?

After the umpteenth round of talks on the next long-term EU budget between negotiators from the Irish Presidency, the European Parliament and the European Commission, Ireland's Deputy Prime Minister Eamon Gilmore announced yesterday,

"We have concluded negotiations on the EU's multi-annual budget for the next seven years [2014-2020]. I have reached an agreement with the European Parliament's chief negotiator. We have agreed a package that we are both going to recommend to our respective institutions...This is a balanced package that addresses all four of the issues identified by the European Parliament as important for the EU budget." 

In exchange for agreeing (through gritted teeth) to a historic cut in overall spending from the 2007-2013 budget period, MEPs would secure concessions on "more flexibility" between spending areas and annual budgets, plus a mandatory 'mid-term review' of the long-term budget in 2016. There was also an agreement on "a method for carrying forward discussions" on direct taxes for the EU budget - whatever that means - but no binding commitment.

All sorted? Not quite. Alain Lamassoure, the French centre-right MEP who is heading the European Parliament's negotiating team, told a rather different story to AFP,

"Some members of the European Parliament's delegation are very cautious [on the outcome of the talks], and it's for this reason that I couldn't commit the European Parliament."

The leaders of the main political groups in the European Parliament will meet on Tuesday to decide whether or not they are happy with the latest compromise on the table. In other words, it seems the Irish Presidency was so eager to end its term with a landmark deal that it got a bit ahead of itself.

And not without consequences. German MEP Reimer Böge, from Angela Merkel's CDU party, resigned as the EPP rapporteur's on the 2014-2020 EU budget this morning in protest against what he described as "nothing more than a manipulation" from the Irish Presidency. According to him,

"The European Parliament's negotiating team last night decided not to continue the negotiations, if they can be called such at all, and submit the texts to the European Parliament."

A 'deal' that turned out not to be a deal after all. We can only wonder what ordinary citizens make of all this posturing, brinkmanship and back-room horse-trading.

Moreover, several important questions remain unanswered. How would this 'revision' work exactly, and what would it involve? Are MEPs prepared to drop their demand for it to take place under QMV and not unanimity? What's the point of having a non-binding discussion on 'own resources', given that there's no appetite for direct EU taxes across the bloc?

Ultimately, MEPs should be careful not to overplay their hand in seeking concessions - if push came to shove would they really veto the agreement painstakingly negotiated by EU leaders?

Things should become clearer next week. For the moment, it's worth keeping in mind that, whatever the outcome of the negotiations with MEPs, the deal will have to be endorsed by EU member states by unanimity - meaning that the UK would still have a veto over it. 

When ideology meets economic reality (part III): Germany squabbles over the Financial Transaction Tax

The Bundesbank, The Deutscher Aktieninstitute (DAI), and even EU civil servants from the 11 participating countries have all warned against the FTT in its current form.

Today saw yet another German voice raised again the tax – this time from the very party that is meant to be its greatest champion. Nils Schmid, Baden-Württemberg's Minister of Finance – from the German social democrats (SPD)— wrote a letter to German Finance Minister Wolfgang Schäuble condemning the FTT in its current form as “rubbish.” Ouch.

Schmid’s intervention, says that "If the financial transaction tax is implemented as is currently planned, initial estimates show that it is likely to have a serious impact on certain segments of the market (money and capital)." He then calls for a “proper configuration” of the FTT.

So why is this important? Twofold:  first, it shows that in light of the overwhelming evidence of the negative economic impact of the FTT in its current form, the support for the proposal is quickly evaporating.

This now extends to the German political parties that have strongly endorsed it. Remember, the FTT is one of the SPD’s main campaigning issues, and served as the party’s quid pro quo for accepting the EU fiscal treaty. Although Schmid caveated his position, saying that he is not opposed to the idea of a FTT in theory, the point has most definitely been made.

Secondly, the FTT controversy has legs to become battleground ahead of the German elections in September. It is an issue that may split politics, both, within the parties and on a national level.

Officially, Schmid’s letter was met with a standard diplomatic line from the German Finance Ministry – which says it is taking concerns raised by Schmid and German banks “seriously.” They won’t say so in public, but the German finance ministry was most likely nodding approvingly…

Meanwhile, deputy chairman of the FDP parliamentary group ,Volker Wissing, saw his opportunity to strike – and took it, saying that Schmid's letter shows with which "naivety" and "rose-tinted blindness", the SPD had driven the demand for a financial transaction tax.

So far the SPD have remained stumm on Schmid’s intervention. But watch this space. If influential figures within SPD are the latest to start make noises about this, then surely, the Commission’s proposal cannot stand?

"If you had kept quiet, you would have remained a philosopher" - The Commission utterly fails to address flaws in the financial transaction tax

There's an old Latin saying, "If you had kept quiet, you would have remained a philosopher." Reading the Commission's defence of its proposed EU financial transaction tax (FTT), that phrase immediately sprung to mind. It's not the strongest piece, to say the least.

In our continuing quest for transparency, we have published the Commission’s direct response to the concerns raised by the 11 participating FTT member states (docs which we exclusively published last month).

The Commission's response ranges from weak to capricious to outright ridiculous. For example, when it says that "we're not aware of any credit crunch" in Europe. Right...

Arguably the most worrying part of this response is the tone. The Commission is essentially saying ‘we know better’ than financial markets. For example, in dealing with concerns over the impact of the FTT on short term trading, it suggests much short term trading is often “myopic” and that asset managers which trade predominantly in the short term should be subject to less investor demand in transparent markets, despite the success of money market funds and their importance for liquidity.

Now, 'financial markets' are diverse, far from perfect and certainly not always right. However, the Commission would be remiss to just dismiss concerns raised by governments inside and outside the FTT zone - but also actors from across the business and manufacturing community (in addition to virtually every bank in Europe).

We have long suggested that there are three key areas of concern which will have to be addressed before the FTT can even hope of being implemented without huge market distortions – the extraterritoriality, the impact on repo markets and the impact on government (and corporate) bond markets.

Many of the concerns raised by the 11 FTT states - and the Commission's response - related to these issues. Sorry in advance for the length of this post but here are the key points:

Extraterritoriality

As reported this morning, the Commission argues that a “business case” can be created for enforcing the FTT outside the FTT zone. Essentially, exchanges and clearing houses will be responsible for collecting the tax and if they don’t,  the firms in the FTT zone will not want to trade with them.

This is concerning development for a number of reasons:

• First, it will increase tensions and splits within the single market. Financial firms are unlikely to just roll over and accept this. In fact, given the size of the market outside the FTT zone, they could validly refuse to trade with those inside the FTT zone. In any case, the prospects of a scenario similar to that of escalating protectionism in trade dispute cannot be ruled out.
• It also seems very punitive, using alterations in the legislation (the joint and several liability) to enforce it in areas where the tax has already been rejected.
• This also assumes firms do not move out of the FTT zone to escape the tax. This seems unlikely in the first instance, while not being able to trade with those outside the FTT zone if they do not pay the tax (or having to pay their share yourself) seems to make staying inside even less appealing.

The Commission also accepts that double taxation is a concern. However, the proposed solution of setting up agreements on where the tax will fall, seems unlikely especially in the UK’s case since it has launched a legal challenge against the tax.

Impact on government and corporate debt

The Commission also fails to provide much comfort on the impact of the FTT on national debt and borrowing costs. It admits it has been unable to estimate the impact due to lack of info, but further accepts that “Member States might be better placed to have access to such information.”

This raises two questions:

• First, surely legislating on such a sensitive issue without fully knowing the costs on a key area, with many of countries involved in the midst of an economic crisis, is nothing short of negligent.
• Second, if member states are better placed to judge these issues, why does the Commission and the EU need to take the lead and push such a tax in the first place?

Furthermore, we doubt the concerns over ‘redistribution’ will have been assuaged as the Commission accepts that some money from the trading of government bonds will not go to the country that issued them.

This could be of concern for countries such as Spain, Italy or even France which have huge debt markets but whose debt is widely traded around the world and the EU but international firms. It also seems to punish small countries with less developed financial sectors, since the tax will be paid where the bond is traded firstly with the residence principle only kicking in afterwards.

Possibly more worrying is the response to concerns over the corporate debt market. The Commission seems to brush this off, adding that it is “not aware of any credit crunch” with regards to borrowing for businesses. This is despite the clear survey results showing businesses struggle to access credit in many European countries and the many, many press stories on the issue. It surely cannot argue that given the state of the economy, now is the best time to implement the tax.

Repo markets

As we have highlighted this is an area of serious concern. Unfortunately, the Commission continues to persist with a weak counter-argument insisting that repo markets can be easily replaced by secured loans or lending by central banks (while accepting the short term repo market will be all but destroyed by the tax).

This argument is flawed for numerous reasons:

• The market has access to these other instruments but see repo as preferable, the Commission still insists, however, that it knows better.
• Moving more lending to central banks is not desirable! European policy makers are working hard to restore usual financial markets and move lending off central bank balance sheets.
• Without normal functioning markets, monetary policy cannot have an effective impact, while in the eurozone money will not flow cross border and imbalances will continue to build up (any hope of an integrated banking union would be dead).
• Furthermore, all the risks will be taken onto the central banks’ taxpayer-backed balance sheet – surely this is a terrible form of risk being socialised but profit privatised.
• Secured loans do not provide the same level of legal protection as repos. Since collateral is purchased under a repo, if there is a default the collateral has already changed hands. However, under secured loans the claim would go back into normal (lengthy and costly) insolvency proceedings.

The Commission does raise the point that Repos can hurt financial stability, but surely this is more a case for effective supervision and regulation than taxing the market out of existence.

With widespread talk of the FTT being shelved for at least another year, perhaps it's time for the Commission to just admit defeat?

The Financial Transaction Tax: Who will pay, will it work?

The FTT: Who will pay?

The European Commission has now tabled its proposal for a Financial Transaction Tax (FTT) applying to the eleven EU states who so far have said they're willing to go ahead. Arguably, the proposal throws up more questions than answers - here are some of the main ones:

Q: Will non-FTT states get caught up in the tax? 

This is a crucial question and one the proposal does not shed that much light on. The proposal says the FTT will apply  

"on the condition that at least one party to the transaction is established in the territory of a participating Member State and that a financial institution established in the territory of a participating Member State is party to the transaction."

So if one party is not in a FTT state they would still have to pay if their partner in the trade is. This could mean occasions where people end up paying twice, i.e UK stamp Duty and the FTT. But what does "established" mean? Particularly since most large financial institutions have multiple subsidiaries and passports.

Q: Is that why some in the US are concerned?

A group of US business groups, including the US Chamber of Commerce, has written to the European Commission objecting to its proposal raising similar questions. The letter claims the tax overreaches borders, breaks international treaties and amounts to a “unilateral” imposition of a global FTT. A spokeswoman for the US Treasury also warned that the current plans would “harm” US investors.

Q: Who will collect it?

One of the major omissions in the proposal is an explanation as to who will collect the tax if the transaction takes place outside the FTT area. In the FTT states the exchanges will undoubtedly be expected to collect it (which is why some are upset), but what if a security is traded on an exchange outside the FTT area? There is a provision to make each party "jointly and severally liable" but how would it be collected and how would they pay?

Q: Would it be possible to avoid it?

The Commission has come up with a number of anti-avoidance measures including its own brand of extra-territoriality - the "issuance principle" - that would allow it to tax all transactions of instruments originating in an FTT state. For example, a government bond issued by an FTT country would be taxed no matter where it was traded or by whom. Another issue tackled is "depository receipts", again there is an anti-avoidance measure but how in practice would you outlaw the creation of UK depository receipts or for that matter already existing American Depository Receipts (which have previously been used to avoid paying UK stamp duty).

Q: Is it legal?

According to a study by Clifford Chance there is a danger that the FTT could violate the single market by distorting the free movement of capital and competition between states - though the Commission will have gone to great lengths to make sure the proposal stand up at a potential case at the ECJ. There are also questions about the compatibility with international tax agreements and a range of complex issues surrounding extra-territoriality. Whatever the final answer it could potentially lead to years of litigation.

Q: Will it have a knock on effect on ordinary individuals?

Those in favour of the tax hope this will be seen as a tax on the financial services industry. However it is difficult to see how this will not affect the wider economy or individuals. Every security bought by a pension fund will be taxed and so will reduce someone's pension, likewise taking funds out of the economy through taxation is often inefficient and could hamper economic growth. But the tax is pretty minor in terms of absolute amounts.

Q: Will companies be forced to leave FTT-land?


FTT states in red

The Commission hopes that they have cast the net so wide and set the tax at such a low level that it would not be worth an organisation leaving the FTT states. This seems optimistic as the proposal seems to create incentives not to issue securities within the FTT states. The Commission itself accepts that derivatives trade will likely fall by 75% in the FTT area - it is not clear if this trade is expected to be eradicated or simply move elsewhere.

Q: Will it ever be brought in?

The Commission is hopeful saying:  

"The proposed Directive will now be discussed by Member States, with a view to its implementation under enhanced cooperation. All 27 Member States may participate in the discussions on this proposal. However, only the Member States participating in enhanced cooperation will have a vote."

Under the treaties the measure will need at least nine states to agree the final proposal and there is still a possibility that some of the eleven states will read the detail and change their minds. Interestingly it also remains unclear at what stage a state can still decide to drop out.


Q: What would happen to the proceeds?

The proposal mentions some states using the revenues to pay their EU budget contributions. They would be free to do so but at various times, proponents of the tax have also wanted to spend it on projects such as international development and job creation.

Should we feel sorry for underpaid EU civil servants?

A tale of woe? 

The European Parliament has published a helpful graphic to explain the terrible conditions that EU civil servants have to endure. EU civil servants have to work 37.5 hours a week (i.e 9 - 5:30 with a merger hour for lunch) and retire at the age of 65 on a potential 70% of their final salary.

Not all EU civil servants are overpaid, some (for instance some contractors) are not, and many work hard but there are some interesting omissions in this particular public information advert, such as:

Number 1) An average EU yearly salary is approx £67,693 (€78,503).

Number 2) An average EU yearly salary is approx £78,524.23 (€91,064) if you claim the tax free 16% expatriate allowance (an estimated 70% of EU staff do this).

Number 3) EU officials pay tax at their own specially low rate. On an average EU salary + expat allowance of around £78,524.23 you would pay only £12,610.40 in EU tax (16.06% in total). Whereas in the UK you would pay £26,201.54 in tax (i.e. 33.36%).

And this is before going into the arcane details of travel expenses, household allowances and free school fees....we will leave it up to you as to whether these area really such bad working conditions.

Detail - Number of EU officials: 

Detail - EU tax:

If an EU official has a monthly salary €6,938.38 [€83,260.56 per year] – he / she would pay EU tax of €1,292.53 per month [or €15,510.40 per year], the same as an annual UK salary of £67,693.3 and paying only £12,610.40 in tax (a marginal rate of 45% but an actual rate of only 18.6%).
 

However in the UK tax system an annual salary of £67,693.3 would set you back £21,652.55 in tax and National Insurance (i.e an actual rate of 32% and a marginal rate (inc NI) of 42%).

Many EU officials however claim a tax free expatriate allowance. If you add the 16% these EU officials can claim for not living in their own state then have an effective EU ‘salary’ of £78,524.23 with still only £12,610.40 paid in tax (16.06% in total). Whereas in the UK you would pay 26,201.54 in tax + NI on a salary of £78,524.23 (i.e. 33.36%).

In this case a tax saving of £13,591.54.

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.

Missing the target…again…

Despite there now being less than 24 hours to go until the emergency eurozone summit on Greece, and probably Italy and Spain, there is still no clear consensus on what structure a second Greek bailout will take. The main sticking point, as has always been the case, is on private sector involvement.

The original ‘French proposal’ for a debt rollover now seems dead and buried. The German plan for a bond swap looks to have been brought back from the brink but still looks unlikely, given the complexities and the fact it will surely result in a default rating but deliver minimal debt reduction. The focus has, therefore, turned to two proposals: a debt buy-back and, more surprisingly, a bank levy.

We’ve covered the prospect of a debt buy-back before (in our Greek paper here), so we’ll try and keep it brief. It’s not the worst idea eurzone leaders have come up with, as it could raise a decent chunk of change given that Greek bonds are trading at substantially reduced prices. There are a couple of problems though. First, the ECB has said it will not sell any of the bonds its holding, which shuts off a large pool of potentially easy to negotiate deals. There are plenty of private bondholders who take a similar line since they’re holding the bonds at par value (level at which they were purchased) meaning that they would have to book the losses if they sold them (the idea here is that they expect the EU/IMF/ECB to find another solution so have no need to accept the offer - moral hazard at its finest). Lastly, the price of bonds would likely spike if a buy-back was agreed, massively reducing the benefit of the scheme (to avoid this, ex-ante agreements on prices of bonds would need to be made with all bondholders willing to sell, this raises a whole new host of issues such as collective action problems, complex negotiations and default in the eyes of the credit rating agencies).

So, on to the new darling of the day, the bank levy. This has come out of nowhere (and that’s where we expect it to go back to) after an options paper was leaked to the FT and Reuters. The details are incredibly thin but the basic idea is that a tax is imposed on banks in order to raise money to contribute to a second Greek bailout. The leaked paper suggests this could raise the necessary €30bn over three years (convenient and unsubstantiated). There are a lot of problems with this proposal.

First off, it’s an incredibly inefficient way of making the private sector pay for a Greek bailout since it’s levied across the board rather than on those with the biggest Greek exposure. It’s incredibly ironic (and ultimately depressing) that the most accurate tool for making the right people contribute (a restructuring of Greek debt) is already right in front of eurozone leaders' eyes, particularly after the data was released under last week's stress tests. Secondly, it is realistically impossible to achieve since the German, French and British banking federations have already come out against it, making any short term deal (which is exactly what is needed in the Greek case) very unlikely. And, if it was ever agreed, it would probably be passed onto consumers through higher fees and charges, not to mention the fact that banks may consider relocating outside the eurozone if they face an extra levy.

The levy also raises an interesting issue regarding the UK, since UK banks do have some, albeit small, exposure to Greece. Would eurozone leaders credibly propose that only eurozone-based banks would be subject to the levy. "What about non-eurozone banks that lent to Greece?" the eurozone-based banks would surely ask. But on the other hand, neither the PM nor the Chancellor will be in the room tomorrow and the likelihood of the UK agreeing to take part in the levy is, in any case, probably zero.

The bank levy seems particularly poorly thought through, even by recent standards, and looks to have greater political than economic motivation. Given the state of the crisis, and its recent escalation to include Spain and Italy, eurozone leaders cannot afford to waste time, not to mention the trust and patience of financial markets, on poorly targeted and poorly planned strategies. Ultimately, we still think a debt restructuring gives the best value for money in the long run, taking into account the positives of debt reduction and the negatives of a default (which you get from many of the other plans anyway).

The Robin Hood tax: take from everyone and give to the EU

The European Parliament today backed calls for an EU financial transaction tax (FTT). MEPs say that their version of the FTT comes with at least two great merits:

- it’s a simple way to raise revenue
- it brings the financial sector to account and deter short selling.

MEPs, we suspect, feel that targeting greedy bankers is the only way to sell an EU tax to an increasingly sceptical public - EU tax proponents is a minority cult. So in the minds of MEPs, two negatives equal a positive. Right?

Wrong.

First, the idea that an EU financial transaction tax could feed straight into the EU budget, as MEPs propose, is fiction. For one, the complexity of financial transactions and the difficulties involved in working out a sensible burden sharing arrangement between member states with massively different levels of financial activity - as well as a fair methodology for deciding what, exactly, should be taxed - make it wholly inappropriate as a tool for funding the EU budget. This is particularly true as greater simplicity and transparency are often cited as key reasons for introducing an EU tax (as opposed to the current - and admittedly complex - system, which combines VAT receipts, contributions based on GDP and 'own resources').

In the absence of a burden sharing mechanism, the impact of an EU financial transaction tax on the UK will be absolutely massive, given the City of London. Both directly, but also indirectly, as many financial transactions taking place outside the UK, are still linked to activities in the City in one way or another.

MEPs say that they hope to raise £20bn in the UK through a transaction tax, but this estimate seems, quite frankly, to be plucked out of thin air. Using MEPs' own methodology (which isn't really a methodology at all to be honest) the burden on the UK is more likely to be between £40bn and £180bn.

Data on financial transactions are as patchy and opaque as the EU institutions themselves, which make it very difficult to nail down what kind of figures we're talking about.

But the World Federation of Exchanges, for example, put the level of financial transactions in the UK at £600tr (for 2009). This would put the impact of the tax at between £60bn (at an incidence of 0.01%, which is the lower end rate proposed by MEPs) and £300bn (at 0.05%, which is the higher end rate proposed by MEPs). If we limit the tax to just derivative, equity and bond trades – which MEPs have proposed - the impact falls to £40bn - £180bn (at same rates).

So, without any adjustments or burden sharing arrangements, the UK would send up to £180bn to the EU's coffers under this proposal! This will of course never ever happen, but it should serve as an illustration of how poorly thought through MEPs' proposal is.

Equally important, contrary to what MEPs seem to believe, this will not be an exclusive tax on rich Londoners or bad bankers. Instead, the cost will be passed straight down to consumers and the real economy (through higher borrowing costs and higher commodity prices, for example) - everyone will have to cough up.

Better regulation and carefully targeted taxes from national governments – or via global coordination – are much better options. As even the European Commission has admitted, with EU taxation commissioner Algirdas Semeta saying:

"With regard to a financial transactions tax at EU-level only, I firmly believe that it is premature to commit to such an option. In fact, taking into account the potential impact that this could have on European competitiveness, it would be irresponsible to proceed with such a tax"

There is also the significant question mark over where, how and why this additional money will be spent. Somehow we don't take huge comfort in the thought of MEPs all of a sudden having billions in extra cash to play around with.

In any case taking from a large tax base and redistributing the money to a very small EU elite - which operates several levels removed from citizens - doesn't sound very Robin Hood-like.

EU tax: the reactions from around Europe

EU Commissioner Lewandowski hasn't exactly hit a home run with his comments about the Commission's forthcoming proposals for an EU tax.

The idea was outright rejected by the German government, which pointed out that its coalition agreement stated: “We reject an EU-tax or the involvement of the EU in national tax and duty collection.” A spokesperson from the German ministry of finance told today’s FTD that “Nothing has changed in this stance.”

As expected, the British government also gave the idea the cold shoulder, with Treasury Minister Lord Sassoon saying that the British Government

“is opposed to direct taxes financing the EU budget. The UK believes that taxation is a matter for member states to determine at a national level and would have a veto over any plans for such taxes.”

Also France, which in the past has advocated fiscal centralisation and an EU tax, doesn't seem particularly impressed. “We judge this idea of a European tax perfectly ill-timed,” said France's junior minister for Europe, Pierre Lellouche. “Any extra tax is currently unwelcome. It is much more the time for the member states and also European institutions to make savings.”

Okay, it's not the idea of transferring fiscal sovereignty but the timing that rubs Monsieur Lellouche the wrong way, but still.

But Lewandowski does have some supporters. A spokesperson for the Austrian Minister of Finance Josef Pröll, for exampe, tells Die Presse that

“if we use [a financial transaction tax] as a source of finance for the EU, it eases the burden for net contributors. Whether the financial transaction tax goes into the domestic budget or is used for the refinancing of the EU or a small amount is transferred to the EU is not that important”.

Having previously confirmed his commitment to a financial transaction tax his support was somewhat expected. Spanish Prime Minister Zapatero also said he would consider a concrete proposal from the Commission “with interest” and “maximum attention,” if “the idea behind it is strengthening the European Union,” reports EFE.

Media reactions haven't been overly positive either (at least from the Big Three). Einar Koch, Chief Correspondent of German tabloid Bild, exclaims "EU tax, no thank you!” He argues that “The EU desperately needs structural reforms in its expenditures instead of new sources of revenue.” Another attack comes from Dutch MEP Derk-Jan Eppink who says that the proposals should be fought “with fire and sword,” according to Standaard.

"More money from less citizens?" asks Clemens Wergin in Die Welt. He points to Europe’s shrinking population and the apparent failure in Brussels “to understand [the] basic correlation between demographic trends and governmental expenditures.”

A commentary in Focus at last finds something positive in a potential direct tax. Giving the European Parliament a say in tax jurisdiction would force MEPs to justify the added burden of additional expenditure to their constituencies. This could actually cause the parliament to take its role of budgetary oversight seriously, instead of constantly propose spending increases to fund their own pet projects. An interesting thought.

Judging from these reactions, Brussels latest attempt at grabbing fiscal powers will last about as long as England in the World Cup. But this being EU politics, we doubt the idea will go away so quickly. As we've noted before, there's a dangerous temptation for the net contributing member states here, which Lewandowski is trying to exploit and test (with limited success so far).

Brussels specialises in repackaging and rebranding ideas (but with the substance unchanged), in order to overcome opposition.

Let's wait and see until Lewandowski has actually tabled his proposals. The outcome is still far from clear.

EU-tax back on the agenda

Today's FT Deutschland splash reveals that EU Budget Commissioner Janusz Lewandowski will in September table different options for introducing an EU tax to fund the bloc's budget. Apparently, Mr. Lewandowski believes that the current drive in Europe to cut spending is making governments more receptive to the idea of a single tax.

He said,

Many countries want to be unburdened. In this way, the door has been opened to think about revenues that are not claimed by finance ministers...If the EU had more of its own revenues, then transfers from national budgets could be reduced. I hear from several capitals, including important ones like Berlin, that they would like to reduce their contribution.

The thinking is that if the Commission raised its own taxes, then the burden on member states' budgets would be reduced, and member states would pay 'less' to the EU.

This logic is of course fundamentally twisted as the burden on taxpayers - which surely is what matters in the end - would be exactly the same. Only thing that would change is the layer of government that raises the taxes. The Commission is effectively trying to play on governments' desire to be seen as cutting spending as a pretext to concentrate taxation powers in Brussels. The views of taxpayers - the folks who will actually pay for this - are simply ignored.

Pretty disingenuous.

According to Lewandowski, possible sources of an EU tax include a financial transaction tax, levies involving the Emissions Trading Scheme and/or a levy on air travel. EUobserver reports that the Commission hopes that a deal on an EU-tax can be reached during the Danish Presidency in 2012.

Unsurprisingly, Lewandowski's comments have already provoked pretty strong reactions, with German Finance Ministry spokesman Tobias Romeis telling reporters in Berlin that, "Calls to introduce an EU-tax are in opposition to the position the government established in its coalition treaty, in which it says that we will deny an EU tax or EU involvement in national taxes."

So the German coalition government says it will oppose an EU tax, but what about the British one?

This would seem like an obvious one for the Coalition to squash given that it represents a massive step towards a federal Europe. But you can also see the temptation.

A direct EU tax on, say, financial transactions or travel is easier to 'hide' than a line in the annual budget. The problem is that the UK's contribution to the EU is going up all the time - despite the almost universal belief in Britain that the EU budget is exceptionally poor value for taxpayers' money. The UK's net contribution is projected to rise to £10.3 billion in 2014/15 (according to the Coalition's June budget), meaning that in a decade, the UK's net contribution has increased by around 230%.


This continuous increase has become a bi-annual embarrassment, which any UK government would like to put an end to (particularly when everyone is talking austerity). Creating an arrangement under which the UK's EU contribution actually doesn't show up in the budget would do the trick.

In the end, though, it's very unlikely that the Coalition would be able to pull it off even if it wanted to - particularly as it has to get around its pledge to hold a referendum on transferring powers to the EU. And let's remember, most of Cameron's Cabinet genuinely don't want an EU-tax for a range of reasons, including ones relating to ideology and democracy.

This debate will most certainly drag on.