End Customer Likely to Bear Cost of Any New Tax on the EU Financial Sector
Since the financial crisis hit in 2008, the debate on whether to impose a new tax on the financial sector has been raging in Europe. With the European Parliament pushing for such a tax, the European Commission launched a consultation in February 2011 to get feedback on three potential taxation models:
• Financial Transaction Tax (FTT)
• Financial Activities Tax (FAT), levied on the sum of profits and wages
• Bank Levy (asset or liability-based)
In order to obtain the views of members, CFA Institute sent a poll to 15,244 members in the 27 EU member states and Switzerland. The survey found the 722 respondents evenly split on whether levying a new tax on the financial sector is justifiable, with 48 percent of respondents considering it justifiable and 49 percent calling it unjustified. However, a majority of respondents were in agreement that the cost of these proposed taxes would be mainly borne by the end customer: 75 percent for FTT; 60 percent for FAT; and 59 percent for a bank levy.
In addition, findings suggest that to be effective, avoid regulatory arbitrage, and preserve EU competitiveness, any tax would have to be applied at least at the G20 level. In fact, for each of these models of taxation, members were asked to determine the level at which they would be most effective. Respondents answered similarly regarding the FAT and the bank levy: 54 percent and 59 percent, respectively, think they would be most effective at the G20 level or higher. That compares to the 29 percent and 23 percent, respectively, who think the taxes would not be effective at any level, and the 9 percent and 11 percent who think they would be most effective at the EU level. Meanwhile, opinions were split on the FTT: 45 percent of respondents believe it would not be effective at any level while 44 percent think it would be effective at the G20 level or higher. Only 5 percent think the FTT would be most effective at the EU level.
Another interesting result from the poll is that, if a new tax were imposed on the financial sector, the one respondents consider to be the most appropriate is a bank levy (31 percent), followed by a FAT (15 percent) and a FTT (12 percent); other respondents chose a mix of two or three forms of taxation under consideration, or had no opinion (16 percent).
Political Momentum is Growing
This last finding is particularly interesting given recent developments on the subject, which has received heightened political attention and has hence moved at an unusually quick pace in EU corridors. Indeed, on 29 June, the European Commission published its proposed budget for the 2014-2020 period, which includes an FTT — the taxation model least supported by CFA Institute members — as a source of funding. An FTT, it says, could generate up to €37 billion per year by 2020.
However, many obstacles are on the way for this to materialize. First, a new regulation establishing an FTT would need to be approved by the two decision-making bodies in the EU: the European Parliament and the Council (composed of the 27 member states). The proposed regulation foreseen to be published in autumn 2011 would certainly lead to fierce debates in both institutions. Then, for the proceeds of an FTT to go to the EU budget instead of going to the member states’ budgets, a formal approval by both institutions would be required. This is likely to be particularly difficult to achieve in Council, as some member states are keen on opposing any measure that could be seen as a dent in their fiscal sovereignty.
Several stakeholders, including influential political figures such as the European Central Bank President Jean-Claude Trichet, have already voiced their opposition to a Financial Transaction Tax applied only at the EU level. For our part, CFA Institute will continue to voice members’ concerns to EU policy makers, namely that the costs of an FTT would be passed on to end customers, and that an FTT not applied globally runs the risk of leading to regulatory arbitrage and therefore undermining the competitiveness of the EU financial sector.