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European Commission and a Financial Transaction Tax

European Commission and a Financial Transaction Tax

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Published by mestrum
Factsheet of WEED Germany on the European Commission's arguments against the Financial Transaction Tax
Factsheet of WEED Germany on the European Commission's arguments against the Financial Transaction Tax

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Published by: mestrum on Sep 05, 2010
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09/05/2010

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Factsheet 
EuropeanCommissionagainstFinancialTransactionTax
Inaninternalpaper
1
,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:
 
increasethecostofcapitalfortheeconomyaswellasforthestates(governmentbonds)
 
negativelyaffectthepricediscoverymechanisminmarkets
 
increasevolatility
 
createlessrevenuesthanisclaimedbyitssupporters,and
 
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ofinvestors.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thepricediscoveryprocessfunctions.Eventhoughtheyrecognizethatthere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moreandmoreandtransactionsarebeingmadewiththehelpofelectronicsystems,whichanalyseandevaluatehistoricdatainordertodeterminepricetrendstothentakeadvantageofthisknowledge.60%ofallthetransactionsattheNewYorkstockexchange

1
EU Commission. Issues Note. Financ
ialSectorTaxation.August2010.Notpublished

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