Proposed tobin tax underestimates economic effect, claims AFME

22 June 2012

A study commissioned by the Association for Financial Markets in Europe (AFME) claims that the European Commission’s (EC) latest impact assessment of the proposed financial transaction tax (FTT), also known as a tobin tax, seriously underestimates the economic effect it would have.

The study, produced for the AFME by economic consultants Oxera, concludes that the proposed FTT would not only reduce economic activity but would also be a highly inefficient way to raise public funds, even on the EC’s own assumptions about revenues likely to be raised and potential costs incurred.

Concerns that it may further restrict already limited bank funding to business have also been raised, although of course the industry itself is more worried about falling profits at investment banks and other financial market participants if the vast volumes of financial trades are charged tax.

Any new FTT could impact the budget available to invest in new technology at investment and retail banks, as one supports the other, asserts the industry. No value added tax (VAT) or similar sales tax is charged on any trades anywhere at the moment, although many argue that it should as a means to pay for the taxpayer funded bank bailouts that have continued since the 2008 crash.

Oxera, however, says that the EC’s assumptions concerning the FTT show that the ratio of gross domestic product (GDP) lost to tax revenue gained as a result of the tax could range between 2:1 and 4:1. But even this is likely to be a serious underestimate, as reduced economic activity resulting from the tax would be expected to reduce other sources of tax revenue.

Due to the these effects, Oxera estimates that the real ratio of GDP loss to overall tax revenue gained could be as high as 10:1, and it restates its comment in a previous report on the FTT published in December 2011 that there is a risk that imposition of the tax could actually reduce overall tax revenues from the economy rather than raising additional revenue.

AFME’s chief executive, Simon Lewis, representing his members’ interests commented: “We have always said that the FTT is a flawed idea, which is likely to have serious negative repercussions for the European economy. We are also concerned that the political discussions on the subject are taking place without sufficiently rigorous economic analysis. This report confirms that much more debate is needed about the meagre gains expected from this tax and the significant damage it would cause to savers, investors and companies.”

By Neil Ainger

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