Banks howl at proposed financial transaction tax

Today the European Union put the spotlight back on a previously mentioned plan to tax financial transactions performed by banks and a variety of other financial players, including insurance companies, pension funds and hedge funds. Opponents have hit back, with the UK and Sweden in particular voicing their opposition.
But what’s their answer to European Commission president José Manuel Barroso who, earlier today, said this:

In the last three years, member states – I should say taxpayers – have granted aid and provided guarantees of € 4.6 trillion to the financial sector. It is time for the financial sector to make a contribution back to society.
-From Mr. Barroso’s remarks to the European Parliament in Strasbourg today

It’s hard to argue with the above statement, which lays out in stark terms the sacrifices that have been made by–and will continue to be made by–European taxpayers. So, unsurprisingly, those who oppose the financial transaction tax (FTT) are doing so via arguments that take a different tack.

• “[A]nything less than a globally applied, uniform tax would distort the markets and reward dissenting low-tax regimes….” says the British Bankers Association
• “Europe’s leaders should reject this proposal as potentially damaging to their economies and the financial system,” says the Association for Financial Markets in Europe
• “Banks conduct transactions for their customers, therefore any tax on transactions would be an additional tax on customers.” This again, courtesy of the British Bankers Association

Let’s look at the two main counterarguments in detail.

1. “Anything less than a globally applied, uniform tax would distort the markets and reward dissenting low-tax regimes.”
   As Mr. Barroso reminded us, the banks are benefiting from trillions of dollars in taxpayer subsidies and guarantees. Sorry, what was that about market distortion again? As for the potential for affected banks and financial firms to relocate to low-tax countries, many point to Sweden’s experience in the mid-1980s. For example, in a paper intended to provide lessons for Canada, Marianne Wrobel makes a link between Sweden’s tax and on stock and bond transactions and a subsequent shift of 50% of all Swedish trading to London. Understandably, a country like the UK whose financial sector is about 10% of its economy would be worried about losing out to competing countries. Yet maybe the better question is whether the UK should be so dependent on the finance industry. Last year the Bank of England estimated that the credit crisis has cost the UK anywhere from £1.8 trillion to £7.4 trillion. A huge range, this–let’s split the difference and call it £2.8 trillion. This is a staggering estimate. Perhaps a little less banking concentration would be a good thing.Even supposing that the British wanted their economy to be so exposed to the financial sector, would they actually see firms fleeing in the wake of a transaction tax imposed in all 27 countries of the European Union? Where would they go? Switzerland, with its high banking capital requirements and steely determination to keep down the value of the Swiss franc? We’re not talking about re-locating a sock factory. For all of its technology, financial services is an intensely client-driven and human resource-reliant industry, meaning that local factors like language, location, relationships, currency, timezone, etc. are crucial. The barriers to exit are extremely high.
2. “Banks conduct transactions for their customers, therefore any tax on transactions would be an additional tax on customers.”As it turns out, a large proportion of banks’ customers consists of other banks and financial firms active in the capital markets. So the tax would certainly hit those it is intended to target in the first place. Indeed, as Business Week reports, “ ‘The tax would aim at covering 85 percent of the transactions that take place between financial institutions,’ according to the proposal.”As for whether other non-financial firms, small businesses and innocent bystanders would be caught in the net, the devil is in the details. Business Week reports that spot foreign-exchange trades would not be covered by the tax. Nor would transactions with the ECB and other central banks or primary issuances of sovereign and corporate bonds. Crucially,“The EU is seeking to insulate households and small businesses from the levy, and says banks could charge ‘not excessive’ fees such as a 10-euro fee on a 10,000-euro stock purchase.”

It would be foolish to say that an EU-wide tax on financial transactions, proposed to start in 2014, would not end up hitting innocent bystanders or having unintended consequences. Indeed, the EU itself guesses that the tax would have a negative GDP impact of 0.5% in the long-run. That’s not a cost to be borne lightly. However, for a balanced assessment it must be weighted against the benefits of the revenues it would bring to cash-strapped governments and the basic signals of fairness that it would send. The banks might howl in protest, but they should not drown the voices of reason.

Tags: Banking, Barroso, EU, Europe, European Union, financial services, financial transaction tax, FTT, Sweden, United Kingdom

Category: Banking