The Financial Transaction Tax: The Way Forward for the European Union?

Abstract

The aftermath of the financial crisis of 2008-2009 has seen considerable pressure for financial sector reform, and thus the European Union has decided to go forward with a financial transaction tax ('the FTT'). As disunity between the Member States resulted in enhanced cooperation being resorted to for the first time in the area of taxation, the measure will be implemented in only eleven Member States. Whilst this article agrees that reform is imperative, it is argued that the proposed FTT is highly unlikely to improve the functioning of the financial sector. Its motivations appear to be primarily political, as the Financial Activities Tax ('the FAT') would have been preferable on legal and economic grounds. The article identifies specific aims for financial sector reform. Thereafter, the traditional dominance of regulation in this field is questioned, and consequently the decision of the EU to adopt a tax instrument is embraced as a step to achieve a combination of regulatory instruments and corrective taxation. However, the decision to go forward with the FTT is criticized, as it appears unable to address the objectives for reform and is likely to adversely impact on financial markets and the prosperity of Europe.