The debate continues on the Financial Transaction Tax. The guest author today examines the comments from "Mr Financial Transaction Tax" at the EU. Philip Martin is the former co-head of global tax at Nomura and is now providing investment banking tax services via his company Henleydown Consulting Limited. You can reach Philip at henleydown@btinternet.com
Last week Manfred Bergman the director of indirect taxation and administration at the European Commission released a video to explain the Commission’s proposal for a financial transaction tax “FTT” (Video is below). Mr. Bergman confirms the purpose of an FTT is to raise money from the financial sector and to limit undesirable market behaviour to stabilise markets. Mr. Bergman believes a widely applied charge at a low rate will be easily absorbed, but demonstrates this with reference to the marginal increase in the cost of share purchases rather than the marginal income earned by broker dealers.
He is therefore guilty of proving his point on affordability by reference to the wrong target audience. Mr. Bergman also accepts that certain activities will significantly reduce, by which we assume he refers to the 70 to 90% reduction in activities such as derivatives highlighted within the European Commissions impact assessment. However, he does not address the dichotomy here which is that an effective tax needs a stable and continuing tax base, and preferably to apply to economic rents, whereas the stated intention is to reduce the number of transactions and hence the underlying tax base. As a result the estimate revenues of € 57bn must be highly questionable.
Mr. Bergman also does not make clear how the proposal will be limited to intra-bank market transactions. In a simple transfer of stock from one counterpart to another via a single broker-dealer there would appear to be four charges unless an intermediary exemption is introduced. There is no logical reason for an intermediary to bear the cost of an agency bargain and therefore investors will inevitably bear the cost and, with the multiplication of charges, a rather higher cost than advertised. It is important that there is an open and transparent debate about new forms of revenue, but at present the real issues and difficulties with an FTT remain unclear.
