Bursting the Bubble

The Financial Transaction Tax: 28 candles for ATTAC?

14 June 2013 | by

The introduction of an EU-wide tax on financial transactions (FTT) has been presented by some as a key political and economic response to the crisis, becoming an important element of the evolving European Economic governance initiatives, reaching beyond mere fixing of the immediate consequences of the economic crisis.

In September 2011, the European Commission issued a draft directive applying a tax to transactions in shares, bonds and derivatives. While this foray failed due to opposition from Britain, Ireland, Luxembourg, Sweden and other countries, a group of willing Member States decided to introduce the tax despite a lack of unanimity.

Earlier this year, 11 Member States (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain) cleared the way to use the EU’s enhanced cooperation mechanism (laid down in Article 20 TEU and in Articles 326 to 334 TFEU) to introduce a Financial Transactions Tax (FTT) in their financial markets. This project was approved by the ECOFIN Council in January 2013. The FTT thus represents the first use of enhanced cooperation in tax policy in the EU.

The recently politicised debate about the merits of the tax urges the question what are the elements of the ongoing controversy, and how will its dynamics affect the policy from further adoption by more EU Member States.

Economically, a key controversy has centred on the tax’s expected impact of reducing high-risk speculations and having a positive redistribution effect.

According to the Commission’s revised FTT proposal, the tax would comprise every financial institution, all financial markets and all financial instruments, levying rates of 0.1% on bonds and shares and 0.01% on derivatives; Member States are free to apply higher rates. The revenues – estimated at roughly € 31 billion per annum (€ 57 billion in the 2011 proposal) – will be shared between the participating Member States and the EU.

There are valuable arguments both in favour and against the proposal based on the expected effects of its implementation. While basic agreement exists regarding the positive income effect the tax is likely to have (current Commission revenue estimates count with annual revenue of around € 30-35 billion gained mostly from taxing derivatives), concerns exist mostly regarding its net effect as a regulatory tool.

Here, it is assumed that missing taxes on financial transactions – while not an immediate cause – were a contributing factor to Europe’s as well as the world’s financial crisis.

Tax and Customs Commissioner Algirdas Šemeta hopes to mitigate fears that the tax would hit growth of EU economies by stressing that the proposed FTT does not include the real economy and would not encourage relocation of capital as ‘any transaction would be taxed as long as there is an established economic link to the FTT-zone, be it through parties to the transaction, or if the traded product was issued there.’

Impact studies have shown a mixed verdicts on this claim.

In quantitative terms, a Commission study estimates that due to the FTT, EU overall GDP will have fallen by 0.28%. An IMF study confirms a negative impact of a FTT on liquidity in financial markets.

Based on both national and European data, a more differentiated picture emerges. According to the more optimistic studies, any long-term macroeconomic ailment would be clearly outweighed by its contribution to ‘fairer distribution of the weight of the crisis’. As a tool of social policy, the tax engages actors of the financial industry to shoulder parts of the costs for the financial crisis.

Overall, the argument that economically, the FTT-11 sits comfortably with existing economic objectives of the evolving architecture of EU economic governance can be justified.

Besides the economic positives, what other factors could lead other Member States to adopt the FTT? And how strong is the chance that the ‘spill-over’ will happen?

Will the enhanced cooperation lead to a ‘spill-over’?

In fact, the mechanism of enhanced cooperation alone should eventually lead to the adoption of the policy in question by more Member States. The case for this argument can be drawn from its legal basis: according to Art. 20 TEU, ‘enhanced cooperation shall aim to further the objectives of the Union, protect its interests and reinforce its integration process’. This formalised mechanism is hence not supposed to perpetuate a fragmented policy implementation pattern across the EU, but is rather intended to make early adoption of policies beneficial for the whole Union possible and encourage more Member States to join such projects later. The usage of enhanced cooperation thus further underlines the intention for the FTT to be embraced by a larger number of Member States.

However, formally expressed intentions and the political reality are often two different things. Literature on economic integration helps us understand what political factors could actually push states to adoption (i.e. lead to a spill-over). Four factors have been identified: technical necessity, strong supranational agency, favourable elite opinion and public support.

First, technical necessity could produce ‘automatic’ adoption for self-interested rational reasons. When eleven Member States adopt a common, ‘FTT-11’ model, an obvious reason for a state which already has some sort of an FTT to join the ‘EU-FTT club’ would be the danger of ‘double taxation’. As various existing FTT regimes in Europe remain in place, in some situations transactions could be taxed both by the FTT-11 countries and in the financial territory of destination in the non-FTT-11 state. Official documentation suggests that institutional actors recognise this problem. Adopting the EU FTT may thus be in the interest of the remaining Member States to protect financial investments in their territory from the risk of double taxation.

Second, the EU, being a supranational agency, (or rather the supranational agencies it comprises) could induce necessary top-down pressures to promote the FTT through expertise and agenda setting.

The recently evolving support from the European Commission, the European Parliament, the European Economic and Social Committee, the European Central Bank and other supranational bodies increases the likelihood of ‘spill-over’ to non-implementing Member States.

The strength of EU supranational actors’ commitment to the FTT is also evidenced by their apparent willingness to follow through on this policy despite international pressure as the US, a crucial trading partner with the EU, is also sounding warnings that the FTT breaches ‘long-standing international tax norms and treaty agreements’.

Given the increased need for the Commission to legitimise crisis response policies and the overwhelming public support for the FTT, the commitment to the FTT (although more recent in the case of the Commission) is credible and reinforced by the Commission’s choice to prioritise the FTT over the possible impediment on the project for an EU-US free trade agreement.

Third, elite opinion could provide a favourable publicised narrative for a stronger adoption. However, the opposite appears to be the case. Risks for a potential negative ‘spill-back’ emerge from elite opinion in non-FTT-11 states: both epistemic communities and interest groups form powerful veto-players in non FTT-11 states.

Opinion leaders in the UK including influential newspapers such as the Financial Times and the Economist are vocal mouthpieces of the FTT’s opponents. Negative opinion from member states’ elites, particularly Great Britain, is echoed by the commercial news media: in recent editorial articles, the Economist lashed out against the Commission’s proposal.

By the same token, international intergovernmental bodies such as the IMF have been among the most vocal challengers of the FTT. They argue that the FTT would lead to a reduction in trading volume which would have a negative impact on price volatility and market liquidity. Also, the FTT would harm the ‘middle-class’ investor, while tax evasion would be possible through tax havens and disguising transactions.

In the political dimension, an elite opinion rejecting the adoption of the FTT in the currently non-participating states may outweigh domestic public support of the proposal. Similarly, the aggregation of factors under the “risk” criterion may be misleading if future studies were to empirically confirm the heightened volatility of financial markets.

Fourth, public support can push for a further expansion of the FTT from the bottom up. ‘Spill-over’ is facilitated by favourable opinions of citizens who push for government action. The most recent 2012 Eurobarometer survey on ‘Views towards the principle of a tax on financial transaction (FTT)’ finds that since the FTT-11 proposal was announced, overall public opinion in the EU has grown favourable to adopting the FTT. While support remained steady in the FTT-11 countries, in a large majority of non-FTT-11 states (11 out of 16), the support has increased.

Similarly, civil society groups are another important pressure group contributing to a positive ‘spill-over’: already before the current crisis, large-scale public advocacy campaigns in favour of the FTT were carried out in the developed world, including the EU. Besides strong advocacy work from established advocacy groups such as ATTAC, Oxfam and the Group of European Federalists, the case for the FTT within EU institutions was spearheaded by the European centre-left. A broad and time-steeled coalition of civil society actors can thus mobilise sufficient public support to change the policy-makers’ opinion.


As the debate on the economic merits of the FTT in general will likely continue, so will the dynamics of its integration dimension.

In light of the evident public support and civil society mobilisation, we may conclude that the likelihood of a positive influence of a bottom-up push for a ‘spill-over’ of the enhanced cooperation mechanism towards the non-FTT-11 Member States is likely.

It is important to note, however, that an effective, persistently strong opposition to the tax supported by effective lobbying could be enough to derail any possible momentum for an EU-wide ‘spill-over’.

Recent reports show that governments, apparently buckling under this precise pressure, have been getting cold feet, calling to significantly water down the FTT’s scale and scope while disputes persist regarding the usage of the revenue.

This year, the famed ATTAC network is marking its fifteenth birthday. The EU is set to present the organisation with a birthday cake with eleven Member States acceding to its founding, long-term goal of introducing a financial transaction tax. While falling short of being an economic panacea for the crisis, it is indisputably a step in the right political direction: dealing another blow to the aspirations for more social justice voiced by the unemployed in the streets of Europe is a risk far more severe than a potential loss of 0.28% GDP thirty-seven years from now.

However, in light of the presented findings, the likelihood that all twenty-eight (or more?) candles will be lit on a future birthday cake, spelling an EU-wide Financial Transaction Tax, is not certain at all.


  1. FTT is sheer lunacy, dreamt up by people who’ve spent too much time in government and have no experience of the real economy. Any time you tax the input to a product or service, the people who ultimately pay that tax are the users of those products / services. FTT was politically designed to make bankers contribute to the emergency bail-out funding of their industry, but anyone who thinks this tax will be paid for by bankers is deluding themselves. Either unprofitable banking business units would close (increase in unemployment / reduction in financial services taxation revenue) or the cost will be passed on to the users of their services – for example, pension funds. Apart from the damage to the general public, who will fund government debt issues ? Never mind Greece, Italy, Spain, Portugal and Ireland, but who would buy French issued government debt – the European repo market would be decimated, market liquidity would disappear overnight and the chance of a European wide sovereign debt crisis would be massively increased. FTT is utter madness!

    • FTT will slow down useless speculation for the real economy. It will lower bank profit (which is actually too high, compared to the revenue of the “productive” sector). Pension founds are not the speculators so they will not have noticeable losses. Market liquidity will perhaps decrease, but today it is too high, it will not bader the real economy. So the taxpayer will gain and not loose if FTT will implemented. Your argumentation is –nonsense!

      • Sorry but you clearly have no grasp of the issues here.
        1. It won’t lower bank profits because they will either pass the costs on to their customers or, if those customers won’t pay, then stop the taxed activity. Like any real-economic activity, the market evolves based on demand, cost, profitability and supply.
        2. How do you distinguish between negative speculation and positive. A fund manager investing your pension is seeking a positive return on that investment so your pension fund can pay out when you reach the appropriate age. If that return is eroded by FTT then you either have to contribute more from your salary (assuming like most, incl. bankers, that this is deducted from your pay packet – but then your probably a politician / bureaucrat so on an employers final salary scheme) or receive a lower pension.
        3. How will the tax payers gain ? If like Sweden and Brazil, FTT raises virtually nothing but costs hundreds of thousands of jobs and reduces corporation tax receipts.
        4. You also don’t answer the point about who will invest in European sovereign debt and the implications for the Euro.
        In short banks will adjust their activities as they always have done, like any other real economic activity. Unfortunately Fund Managers and Pension Funds are less flexible , so the greatest damage will be to individual pensions as a captive bank customer.
        This is a mindless taxation at the best of times but, in the current European situation, it is almost suicidal.
        Wake up !

        • 1) Less transactions : less benefits. For sure banks can always rise their fees to make more profit. If competition is working it is however limited.
          2) FTT wil tuch mainly the high frequecy speculation, which does not bring nothing good to the real economy.
          3) High frequency speculation does not emloy hundred thousend people!
          4) It is not the high frequency speculation who inwest in European sovereign debt. If it is an european crisis it is because of the ECB status. ECB should buy sovereign debts, with low interest rates, so the debt will decrease instead increase with the interest rates paid on the market (why USA pays so low interest rates?)
          Your argumentation is a neo-liberal one as wrong as the actual economic policies bringing millions of unemployment people and destroying the future generation.

          • 1) You’re not understanding – tax is effectively a “raw material” cost to a financial transaction, so either the cost to the customer goes up or the activity stops. Cost to customer going up is bad as that damages end users like pensions. Stopping transactions is bad as that mean people become unemployed – not just banks but all the people who they employ and all the people who those people pay money to for goods and services.
            2) FTT will touch everything, not just speculation.
            3) see point 1)
            4) see 2) – sovereign debt relies on the repo market which is high turnover on very small margin (an example of high volume that isn’t speculative). FTT will kill this market.

            • 1) You forget that the tax money is used elswher. As hygfrequency speculation is not a high inensity labor activity, it is leikly that the tax wil give more employment hen the employment lost. Cost for the customer: statistics show that the benfits of capital went up the last 30 years to the detriment of salarial revenues. It is justice that this gains diminishes.
              2) For investments in the real economy this are peanuts. The frequent two way inwestment do not bring nothing to the rea economy. You seem to forget that the stock exchanges were created to help to invest in the real economy and not to became a huge casino.
              4) Wery small margin markets does not help the real economy. sovereign debt is used by the banks as “assets” enabling them to lend 10 times or more, for a good benefit.

  2. EU Bureaucrats are conning the public that this is only a bank tax. My fund manager is not a banker. My market maker is not a banker. I’m not a banker. And bankers will not pay for banking activities, the public, businesses and economy will. European Scrutiny Committee citing EU Commission’s FTT Impact Assessment: “The Minister next discusses the Commission’s impact assessment accompanying the proposal, saying that: a 3.43 % fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.”

    The FTT destroys its own revenue base. There would be a GDP loss of €442 billion that would have been taxed at approximately 40pc for a loss to various governments of €177 billion. The EU will have negative growth for decades. The UK will suffer the most as 80% of EU transactions are conducted in the UK.

    In addition to substantial losses on investment yields, the public can expect significant cost increases for insurance, mortgages, products and services. IMF’s FTT Final Report For The G-20, June 2010, “Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector.”

    The rate is multiples more than the claimed 0.1% tax rate. IMF: “Because it is levied on every transaction, the cumulative, ‘cascading’ effects of an FTT—tax being charged on values that reflect the payment of tax at earlier stages—can be significant and non-transparent.” EFAMA Impact Analysis, “The actual effect of the tax is likely to be even more severe because the tax actually applies various times to each transaction (the so-called “cascading effect” that could give rise to multiple taxation of up to 10 times).” Each of our personal transactions would pay the cumulative results as everyone gets taxed from fund manager, broker, market maker, vendor, clearing firm, etc., and back again. Businesses conduct financial activities that produce products and services that we buy. We pay the tax through higher prices of those products.

What do you think?