Financial Transaction Tax Could Impact EU’s GDP

Financial Transaction Tax Could Impact EU’s GDP
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The proposed Financial Transaction Tax (FTT) would negatively impact the European Union’s GDP, according to a recent review report from PwC.

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Pricewaterhouse Coopers LLP has been commissioned by Futures and Options Association to produce an independent literature review of FTT. In its review report, PwC points out households and non-financial businesses could also be impacted by the proposed FTT.

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EU-11’s Financial transaction tax proposal

European Commission tabled an initial proposal in 2011 for implementing a harmonized Financial Transaction Tax in the EU to cover a wide range of financial transactions. Eleven member states, known as EU-11 were granted permission to implement the EC’s proposal on January 22, 2013 under the EU’s enhanced cooperation procedure.

One of the key arguments put forward to support the EU’s proposal was the introduction of FTT in the EU-11 may help member states to recover the costs of the recent financial crisis and potential future financial crises by aiding fiscal consolidation.

The EU-11’s proposal involves a minimum tax rate of 0.1% to be levied on non-derivative transactions and a minimum rate of 0.01% on the notional value of derivative transactions.

The FTT has received support from business leaders such as Warren Buffett.

PwC’s review

After an extensive review of the body of literature assembled on the EC’s proposal, PwC notes that the EC’s proposal will have a negative impact on EU-27 GDP, with the level of estimated impacts ranging from a decrease of 0.28% to 2.42% of GDP. However, the impact could be lessened if revenues are used for growth-enhancing initiatives.

EC’s proposal has attempted to insulate businesses and households from the impacts of the FTT by ring-fencing day-to-day financial activities such as lending and borrowing from the scope of the tax. However, the PwC report notes there is a distinct possibility that the cost of paying and collecting the tax will be a “pass through” cost for corporate and institutional users and could have consequences in terms of the economic viability of their market activities including raising capital and managing risks.

Pointing to national FTT experience, the PwC report notes Sweden’s FTT generated significant adverse impacts and were eventually abolished, whereas others, such as the UK’s stamp duty have been less problematic. The report points out that the mixed success and limited geographical scope of national FTTs may prove to be ultimately less instructive for the EC, suggesting the need for caution when generalizing with regard to their current proposal.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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