The Tobin Tax rears its ugly head, again

In The Tobin Tax rears its ugly head, again, John Chown shows how, despite the fact that the original proposals for an EU-wide FTT were successfully vetoed by the British Prime Minister in 2011, similar proposals are now being implemented by the European Commission in eleven Member States under a process known as the Enhanced Cooperation Procedure. These proposals are intended to come into force on 1 January 2014 (although it now seems that there may be a year’s delay).

He shows how the proposals were introduced in a remarkably untransparent way and were surely an abuse of process, not least as the Treaty of Lisbon is clear that tax legislation can only be introduced with the unanimous consent of all Member States.

On top of that, much of the impact of the proposed FTT would fall on UK financial services: for the Commission has made it clear that the FTT will apply to financial institutions both within the FTT zone and outside the FTT zone if a transaction is with a counterparty that has its headquarters in the zone. A transaction made in the City of London by, say, Deutsche Bank would therefore be liable to the FTT.

So much of the tax collected by the UK tax authorities from economic activity here might well not accrue to the UK, which will also suffer from the loss of tax revenue as the direct and indirect costs of FTT on profits and earnings. “All this from a tax that the UK has already vetoed”.

The UK Government is therefore now challenging the FTT proposals in the European Court of Justice. “This is welcome but not nearly enough.” For the FTT may well be introduced before the case is heard, leading to major uncertainty and significant costs for financial services companies based in the UK.

Nigel Lawson points out in the Foreword to the paper:

“As John Chown demonstrates in this paper, the coming EU Financial Transactions Tax is, if anything, even worse. Designed both to punish the bankers and to raise money for the EU budget, its principal effect will be to drive financial business away from the EU (including the UK) to more hospitable jurisdictions elsewhere.

Belatedly conscious of this danger, the EU is now attempting to extend the FTT so that any transactions involving Eurozone securities of any kind, wherever they are conducted, are caught by the tax. This extraterritoriality may well be illegal: it is clearly unenforceable. And the US has already made clear that it will have none of it.

There are only two world-class financial centres: London and New York. That it should be considered in the interests of Europe to drive business away from London, to the benefit of New York is both perverse and unacceptable. John Chown and the CPS have performed a valuable service in drawing attention to this complex but important issue.”

Media Impact:

Reading the headlines on Friday (31 May), it seemed that the EU’s proposals for a Financial Transactions Tax (FTT) were to be dropped. “Europe rows back on FTT plans “ announced the Daily Telegraph;  “The European Union is rowing back on its plan for an 11-nation tax on financial transactions” echoed the Times;  “FTT may not be the mighty weapon activists hope for” regretted The Guardian (the Financial Times was silent).

These news reports – based on unnamed Brussels sources – suggested that the FTT tax rate could be drastically reduced from its planned 0.1 per cent levy on equity and debt transactions to just 0.01 per cent, bringing the annual take to a tenth of the original €35 billion (£30 billion).

Although the Centre for Policy Studies has repeatedly criticised the EU’s plans for an FTT – see John Chown’s reports here and most recently here – we should not start celebrating. For if these news reports are true, then all that has happened is that:

  1. The EU wanted something terrible.
  2. The proposals may have been watered down to something merely very bad.

On top of that, throughout the process, the Commission has been remarkably furtive. Getting eleven countries to sign up in October, and having this approved by the European Parliament in December, then commenting that details would be published ‘in due course’ (which turned out to be February and even this only after a leak) is not a transparent and democratic process. Nor is the most recent leak and counterbriefing.

So make no mistake: this is not a victory for those of us who are critical of the FTT. The new proposals would still be very damaging for the UK: much economic activity in our most important sector, the financial services industry, would be subject to an EU tax despite the fact that the UK had vetoed this tax (thus violating the principle that tax questions in the EU are supposed to be subject to unanimity). And however low the starting rate, the bureaucratic and regulatory pressures needed to collect the tax would still drive business from the UK to the US. As Nigel Lawson explained in the Foreword to our recent FTT paper, this is both “perverse and unacceptable”.

BBC Radio 4’s Today programme discussed the paper.

And something more worrying may be afoot. For the original leak has all the marks of a classic piece of expectation management (or spin doctoring). A story is leaked to the press with a favourable gloss on an unpopular proposal, hoping to ensure that when the actual measure comes out (with the mischief buried in the small print) it is no longer considered news – and so is then ignored. Note that, far more quietly than the original leak, EU tax commissioner Algirdas Semeta has since denied reports that the FTT is being unravelled by member states – and it is far too early to say what the eventual compromise on the FTT between the Member States will be. And see here for an analysis by John Chown of the “non-paper” issued by the EU following the meeting two weeks ago which assumes that the FTT is still proceeding largely as expected.

The war goes on.

John Chown - Friday, 31st May, 2013