Why targeting the financial sector in this debate?
The financial sector has benefited from a financial support during the crisis. This support has been provided with strict conditions and prevented the whole financial system from collapsing. That said, the financial sector is perceived as bearing responsibility in the occurrence and extent of the crisis. Short-term profit too often prevails over long-term industrial projects. Remuneration structures and levels in the sector have recently been very much out of line with the norms in other sectors.
Let me also add that the financial sector has grown over the last decades allowing economies of scale and enhancing efficiency. One positive consequence has been cheaper and easier access to credit. The presence of financial institutions willing to take the risk to invest in young, innovative companies has also fostered long-term growth. This trend, however, may also have led to a situation in which the sector enjoyed an implicit or explicit bailout guarantee, which could have led to moral hazard and a neglect of the social cost of too-much risk.
Today, the contribution of the financial sector to public revenues is a real debate. The European Council and the Heads of State or Government of the Euro Area have invited the Commission to examine innovative financing at global level, and to explore and develop further the introduction of a financial transaction tax. The European Parliament is also very committed, and adopted a report urging for progress in this field. The European Economic and Social Committee is currently preparing a contribution on the issue which we are looking forward to read.
And the discussion on financial sector taxation also emerged in the debate on own resources for the EU budget as some of the tax proposals have been discussed in this context.
This debate is going beyond the EU. As we know, the International Monetary Fund has been working to identify options for a fairer contribution of the financial sector to the costs of the crisis and the current French Presidency of the G20 is promoting the FTT at global level.
We are working on a highly-debated and moving file. Therefore, we need to have the analysis right and to base our decision on solid grounds. However, time is pressing and I want to define the best option to meet our objectives: more revenues, better market efficiency and preservation of the competitiveness of our financial sector.
I have no prejudice on the instrument. I want the best option to serve our purpose, and the one which will best mitigate the main risks identified: relocation of activity, risk of double taxation through uncoordinated tax schemes and excessive administrative or cost burden due to the cumulative impact with regulation. Your debate today will contribute to finding this delicate balance.
You know that we have two candidates at stake:
First, the Financial Transactions Tax. It originates from the Tobin Tax, initially based on currency exchanges and aimed at ‘putting sand in the wheels’ of financial markets.
More recent proposals target stocks, bonds and possibly derivatives. Some questions are still open. The attractiveness of the tax lies in its high estimates for revenues. What is their degree of certainty? The effects of the tax on financial market stability are debatable. Do they increase or decrease market volatility? Finally, would speculators really bear the incidence of the tax? I am looking forward to tomorrow morning’s session that will look at these issues.
Second, the Financial Activities Tax, which is a tax on the sum of profit and remunerations of the sector. Here also some questions are to be debated. Is the FAT an adequate substitute for the absence of VAT? Could it raise sufficient revenues and correct for externalities? There are various ways of designing a FAT: some countries apply forms of cash-flow taxes. What are their experiences? Do such taxes suffer from strong relocation effects or are they able to impact on economic rents without distorting the economy? The sessions dedicated to FAT tomorrow afternoon as well as the Danish experience will be of great interest in this respect.
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