Taxing the real economy
Proposals for a financial
transaction tax (FTT) have sparked fierce criticism across the financial sector,
but its most significant shortcoming is the burden it will place on the real
economy, says Richard Raeburn, chairman of the European Association of
Corporate Treasurers (EACT).
Many of Raeburn’s members are
responsible for ensuring asset managers deliver full value to corporate pension
funds. As such, he worries that higher transaction costs will be passed on from
the sell-side to the buy-side to pension fund beneficiaries.
“Treasurers want a strong
financial sector that will provide the funding and transactions that they need
to support their activities, which often include trusteeship of their
companies' pension schemes,” he says. “The proposals need to consider where the
tax will actually fall, and in my view this will be on end-users, i.e.
corporates, individual and their pension funds.”
The European Commission
made its first proposal for a FTT last September, suggesting a levy of 0.1% on
equity trades and 0.01% on derivatives traded conducted by EU-based financial
institutions. Separate from the European
Parliament’s proposal, France has decided to move forward with its own plans
for a FTT that are narrower in scope that the EC’s proposals. The French tax
could be introduced this August and would levy a 0.1% charge on naked sovereign
credit default swaps and equity trades only.
However, there is little consensus on the mechanics of
the tax, such as how it would be levied.
The FTT could be handled like stamp
duty in the UK, the cost of which is passed along by intermediaries to
end-investors. If so, it could depress share prices and increase the cost of
capital for companies, thereby reducing market investment and jobs.
Raeburn is due to
present his views to the European Parliament’s Economic and Monetary Affairs
Committee on 6 February, during a meeting that could finally bring some
much-needed clarity to how the FTT would work in practice.
The Parliament’s agenda covers
the design of the FTT, including definitions, how the tax would be collected,
the tax rate, practical implementation and its economic and financial impact.
According to Raeburn, any tax
on financial transactions would have to include measures that offer some form
of exemption for end-users so that they are not affected by the costs incurred
within the financial system. However, he admits this may be difficult in
practice. As such, Raeburn would rather politicians look for other ways to claw
back bailouts to banks.
“I suspect that there are more
direct ways of recovering costs that governments have incurred rescuing
the financial sector,” he says.
He adds that the FTT is not
the only post-crisis regulatory proposal that has to some extent disregarded
the impact on pension funds and corporate firms.
Raeburn points to the recent
battle faced by the EACT in securing an exemption from central clearing of
over-the-counter derivatives, one of the main tenets of the European market infrastructure
“It has been a
high priority for the EACT to ensure that the regulatory agenda considers
end-users as part of the need to bolster the rules governing the financial
sector,” he says. “Consideration of the impact of the FTT on the real economy is vital.”
The 6 February
meeting at the European Parliament will be chaired by Sharon Bowles MEP, with
Anni Podimata MEP acting as the rapporteur. In addition to Raeburn, the meeting
will include presentations by Avinash Persaud, founder
and chairman of consultancy of Intelligence Capital, Sony Kapoor, managing
director at the Re-Define think tank, and Stephany Griffith-Jones, financial
markets program director at the Initiative for Policy Dialogue and Colombia
A first meeting
among members of the European Parliament’s Economic and Monetary Affairs
Committee to place on 9 January, but as yet, there is little consensus on the
mechanics of the tax, such as how it would be levied.