EU leaders are at it once again; putting Financial Transaction Taxes (FTTs or Tobin Taxes as they are also called) back on the agenda while they are forced on the back foot by the unresolved Euro crisis. At a time when citizens are losing faith in the ability of our leaders to solve the crisis, talking about FTTs, which remain heavily popular with the public, almost always earns political brownie points.
But what can FTTs really achieve? And is the current approach, presented by the European Commission, designed to succeed? If not, should be abandon the idea altogether or is there another tax design that will work better?
One thing is for sure FTTs will not change the world, nor democratize global finance. Nor will they raise the hundreds of billions of Euros of revenue that is sometimes attributed to them. But, approached sensibly, a well-designed and flexible regime for financial transaction taxes can deliver a lot of benefits.
Investments that are growth-enhancing, that generate employment and that improve the sustainability of the economy are good and desirable. However, even before the crisis hit, the European Union suffered form a lack of optimal levels of investments in infrastructure, green energy and energy efficiency measures and small and medium sized enterprises. This was driven by a number of factors inherent to these kinds of desirable investments for example high upfront costs and long payoff periods in the case of infrastructure investments and a lack of policy certainty on carbon price for green investments. An additional problem was misallocation of resources by the financial sector because of excessive short-termism and crowding out by speculative investments.
The crisis exacerbated the paucity of investments flowing to these desirable categories. However, policy makers have been handed a unique opportunity to address many of these deficiencies for example through a more informed reform of the financial system and through the introduction of new and innovative sources of financing. This Policy Brief for the European Parliament identifies the main obstacles that impede desirable investments in the real econmomy and puts forward a set of concrete suggestions on how to tackle these and stimulate more investments in infrastructure, energy effeciency, green energy and SMEs.
In a new Re-Define policy brief we have addressed the all important question of the incidence of financial transaction taxes, seeking to answer the question ‘who pays in the end’, should FTTs be widely introduced. We also demonstrate how a differentiated transaction tax regime can address market behaviour issues such as churning and excessive short termism as well as help reduce systemic risk.