Factsheet
EuropeanCommissionagainstFinancialTransactionTax
Inaninternalpaper
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,theEuropeanCommission(EC)hasmadeitspointclearthattheyarere-jectingafinancialtransactiontax(FTT),whichcountrieslikeFrance,Germany,Belgium,Austria,andGermanyaresupporting.TheexplanationisthattheFTTwould:
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increasethecostofcapitalfortheeconomyaswellasforthestates(governmentbonds)
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negativelyaffectthepricediscoverymechanisminmarkets
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increasevolatility
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createlessrevenuesthanisclaimedbyitssupporters,and
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distributetheserevenuesunequally.TheEChowever,isnotreallydealingwiththeargumentsbroughtforwardbytheFTTsupport-ersandisnotdrawingalessonfromthefinancialcrisis.Therefore,theproponentsofthetaxshouldkeeptheircourseandconsequentlyengagefortheimplementationofanFTT.
1.Anincreaseincapitalcosts?
TheECissuggestingthattheFTTwouldleadtoanincreaseofinterestratesforprivateorpublicbondsbecauseinvestorswouldcompensatethetaxinreturnwithanincreaseininterestrates.TherebytheFTTismisunderstoodasatypeoftax,whichreducesthevalueofanasset.Thismis-judgesthebasiccharacteroftheFTT,whichdoesnottaxthevalueassuchofanasset,andthere-foredoesnotraiseitsprice,butwhichinsteadtaxesthetradewithanasset.TheactualeffectoftheFTTisthefollowing:Twodifferenteffectsarisefortwodifferenttypesofinvestors.Ontheonehandtheinvestorsthatwanttoacquireanassetforarelativelylongpe-riodoftime,basedontheirexpectationsregardingfuturepricedevelopments,andontheothersideinvestorsthatwanttoprofitfromshort-termpricefluctuationsontheotherhand.Thelong-terminvestorsbuyandselllessfrequentlyandthereforearealmostnotaffectedbyanFTT,butwouldbenfitfromtheincreasingstabilityandsecurityonfinancialmarketsthroughtheFTTfortheirlong-terminvestments.
2.Distortionofthepricediscoveryprocess
TheECassumesthatthelowerthetransactionscostsandthehighertheleveloftransactions(liquidity),thebetterthepricediscoveryprocessfunctions.Eventhoughtheyrecognizethattherearedamagingtransactions,theybelievethatthesecanbeneglected.Therealityofpresenttradeandtheexperienceofthelastdecades,however,arenottakenintoconsideration.Tradeisacceleratingandmoreandmoreandtransactionsarebeingmadewiththehelpofelectronicsystems,whichanalyseandevaluatehistoricdatainordertodeterminepricetrendstothentakeadvantageofthisknowledge.60%ofallthetransactionsattheNewYorkstockexchange
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EU Commission. Issues Note. Financ
ialSectorTaxation.August2010.Notpublished