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Factsheet

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EuropeanCommissionagainstFinancialTransactionTax

Inaninternalpaper

,theEuropeanCommission(EC)hasmadeitspointclearthattheyarere-jectingafinancialtransactiontax(FTT),whichcountrieslikeFrance,Germany,Belgium,Austria,andGermanyaresupporting.TheexplanationisthattheFTTwould:

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increasethecostofcapitalfortheeconomyaswellasforthestates(governmentbonds)

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negativelyaffectthepricediscoverymechanisminmarkets

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increasevolatility

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createlessrevenuesthanisclaimedbyitssupporters,and

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distributetheserevenuesunequally.TheEChowever,isnotreallydealingwiththeargumentsbroughtforwardbytheFTTsupport-ersandisnotdrawingalessonfromthefinancialcrisis.Therefore,theproponentsofthetaxshouldkeeptheircourseandconsequentlyengagefortheimplementationofanFTT.

1.Anincreaseincapitalcosts?

TheECissuggestingthattheFTTwouldleadtoanincreaseofinterestratesforprivateorpublicbondsbecauseinvestorswouldcompensatethetaxinreturnwithanincreaseininterestrates.TherebytheFTTismisunderstoodasatypeoftax,whichreducesthevalueofanasset.Thismis-judgesthebasiccharacteroftheFTT,whichdoesnottaxthevalueassuchofanasset,andthere-foredoesnotraiseitsprice,butwhichinsteadtaxesthetradewithanasset.TheactualeffectoftheFTTisthefollowing:Twodifferenteffectsarisefortwodifferenttypesofinvestors.Ontheonehandtheinvestorsthatwanttoacquireanassetforarelativelylongpe-riodoftime,basedontheirexpectationsregardingfuturepricedevelopments,andontheothersideinvestorsthatwanttoprofitfromshort-termpricefluctuationsontheotherhand.Thelong-terminvestorsbuyandselllessfrequentlyandthereforearealmostnotaffectedbyanFTT,butwouldbenfitfromtheincreasingstabilityandsecurityonfinancialmarketsthroughtheFTTfortheirlong-terminvestments.

2.Distortionofthepricediscoveryprocess

TheECassumesthatthelowerthetransactionscostsandthehighertheleveloftransactions(liquidity),thebetterthepricediscoveryprocessfunctions.Eventhoughtheyrecognizethattherearedamagingtransactions,theybelievethatthesecanbeneglected.Therealityofpresenttradeandtheexperienceofthelastdecades,however,arenottakenintoconsideration.Tradeisacceleratingandmoreandmoreandtransactionsarebeingmadewiththehelpofelectronicsystems,whichanalyseandevaluatehistoricdatainordertodeterminepricetrendstothentakeadvantageofthisknowledge.60%ofallthetransactionsattheNewYorkstockexchange



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EU Commission. Issues Note. Financ

ialSectorTaxation.August2010.Notpublished

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