Abstract
A financial activities tax (FAT) and a nancial transactions tax (FTT) represent alternative ways of taxing the nancial sector. In preparing a common proposal for the European Union, the European Commission initially appeared to favour the FAT but then swung its weight behind the FTT in late 2011. Its reasoning was that in addition to generating revenue this tax could also help to stabilize the nancial markets by curb- ing excessive speculative trading. is paper takes a di erent position. It argues that the FTT would amplify rather than dampen market instability by interfering with the functions of important nancial institutions. Its conclusion is that the FAT would be superior to the FTT.
Highlights
In late September, 2011, the European Commission proposed that a Financial Transactions Tax (FTT) be the preferred method by which European governments should tax their financial systems to recoup some of the losses incurred in the financial crisis of 2007-08.1 the Commission’s staff studied the merits of a Financial Activities Tax (FAT), which is a tax on the profits and wages of financial institutions rather than a tax on transactions in the financial markets, the EC decided in favour of the FTT on the grounds that it would both generate revenue for governments and help to stabilize the financial markets by curbing trading volumes
This paper contests the above premise. While it accepts that some short term trading in the money and capital markets is speculative and potentially destabilizing, it argues that other parts of short term trading are necessary to the day-to-day activities of commercial banks and asset management firms
In view of the importance of commercial banks and institutional asset managers to the European financial system, it follows that the introduction of a European FTT that indiscriminately restrains all short term trading would bring about a result that is the very opposite of that intended by the Commission
Summary
In late September, 2011, the European Commission proposed that a Financial Transactions Tax (FTT) be the preferred method by which European governments should tax their financial systems to recoup some of the losses incurred in the financial crisis of 2007-08.1 the Commission’s staff studied the merits of a Financial Activities Tax (FAT), which is a tax on the profits and wages of financial institutions rather than a tax on transactions in the financial markets, the EC decided in favour of the FTT on the grounds that it would both generate revenue for governments and help to stabilize the financial markets by curbing trading volumes. While it accepts that some short term trading in the money and capital markets is speculative and potentially destabilizing, it argues that other parts of short term trading are necessary to the day-to-day activities of commercial banks and asset management firms. In view of the importance of commercial banks and institutional asset managers to the European financial system, it follows that the introduction of a European FTT that indiscriminately restrains all short term trading would bring about a result that is the very opposite of that intended by the Commission. Section three focuses on the effects of a capital market FTT on European asset managers. Section four focuses on the effects of a money market FTT on European banks.
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