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Big push in Europe for the Financial Transaction Tax

11 March 2010

By Bodo Ellmers

Recently citizens and civil society organizations all over Europe have been stepping up the push for the introduction of a Financial Transaction Tax (FTT). The large support for the FTT is due to its triple benefit: it has huge potential as a new source of revenue for public budgets, it would contribute to the stabilisation of financial markets, and it would be an invaluable tool for the tax justice movement ─ all of which is badly needed in the aftermath of the global financial crisis.

Raising Revenue

According to calculations by Stephan Schulmeister from the The Austrian Institute of Economic Research (WIFO), a small tax rate of just 0.1% on financial transactions would yield globally US$ 287bn a year, even in a scenario where the higher costs of financial transactions reduce their volume. Even a unilateral introduction in Europe could yield US$ 130bn. This additional tax income is crucial in the current situation where many European governments are running fiscal deficits of 10% of GDP and more in response to the crisis, and the IMF estimates that by 2014 government debt ratios for the G20 countries will reach on average 120% of GDP.

Innovative funding like this is also one way to address the shortfalls in financing development and climate change mitigation and adaptation. Allocating just a small share of the expected FTT revenues to development cooperation would already fill the funding gap of US$ 21bn between what donors promised in 2005 and what the Organisation for Economic Co-operation and Development (OECD) currently estimates for the 2010 outcome. It could also cover the costs of up to US$ 100bn annually for climate change adaptation in developing countries.

The European NGO Confederation Concord demands that the FTT should raise funds for financing development beyond the existing commitment made by European governments to provide 0.7% of GNI as Official Development Assistance (ODA). Concord's position is that the tax should provide predictable additional sources for financing development and global public goods e.g. to tackle climate change as well as hunger, social justice and poverty. The major part of the revenues should be used in developing countries. In any case the precise distribution of the revenues should be fixed in a democratic process under a legitimate international body such as the UN.”

Regulating Financial Markets

While a small tax rate would have almost no impact on non-speculative financial activities, the cost would be higher for speculative ones. This would mean that financial transactions of a purely speculative nature would become economically unviable, thus reducing them and potentially stopping them altogether. It was not without reason that discussions on taxes on financial transactions had their first boom after the big Asian financial crisis of 1997, which was caused by excessive currency speculation. The global financial crisis from 2008 onwards, partly caused by greed and speculation, has again proven what was actually known before:  that the financial sector is seriously underregulated. The FTT is one (but not the only) instrument that could throw sands in the wheels of the financial system and phase out speculative high-risk activities.

Reclaiming Public Monies

It is yet to be seen how high exactly the costs of bank bail-outs and rescue packages for the financial system─ costs borne by the public sector─ will be. Monies generated from an FTT could help the public to reclaim some of this lost capital, as suggested by governments at the G20 summit in Pittsburgh, where governments mandated the IMF to prepare a report on options “as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system.”   For many citizens, asking those who caused the crisis to pay for the post-crisis recuperation of public budgets is the only morally acceptable and politically feasible option. Moreover, in many EU countries financial transactions and services are currently not taxed at all, while conversely consumers pay often more than 20% in value added tax for goods and services offered by the real economy.  

Taking Action

The following months offer a window of opportunities for the FTT. Many governments have already signalled their support, at least rhetorically. Others announced that they would position themselves after they received the analysis and conclusions of the IMF report, and the Communication drafted by the European Commission’s Directorate General for Economic and Financial Affairs (DG ECFIN).  The “European Cross-networking Space on the Global Crises” coordinates EU-wide actions. It has launched the multilingual webpage “Make finance work” on which citizens can endorse the call for a FTT. The petition is linked to initiatives taken on EU Member States level, such as the “Robin Hood Tax” in the United Kingdom and the “Steuer gegen Armut” in Germany. Key advocacy moments are the Spring Meetings of the IMF and World Bank (25-26 April), where the IMF will present its findings, and the Toronto Summit of the G20 (June 26-27).

For further reading

A bibliography on FTT has been compiled by the Robin Hood Tax Campaigners

"FTT – The Time is Now". An update for campaigners around the world

Save the Children Policy brief on the FTT