The European Commission’s proposed financial transaction tax (FTT) can make many current financial transactions uneconomic and will have disastrous consequences at a time when the Continent’s struggling economies are desperate to kickstart growth, according to a new report by consulting firm, Oxera.
According to the report, the proposed Europe-wide financial transactions tax will make the trading of government bonds uneconomic and pensioners would find their savings hit.
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The charge on trades of shares, bonds and derivatives across 11 countries is set to cut GDP by up to 2%, hitting tax revenues by 1% and reducing overall revenues for governments.
The report argues that Commission may have underestimated the reduction in trading and therefore underestimated the impact on liquidity. Furthermore, the Commission has not taken into account the negative economic impact of deterring financial transactions that bring benefits to the wider economy.
The research, which has been undertaken on AFME’s behalf by Oxera, estimates that if derivatives volumes fall by 98%- as they did when an FTT was applied in Sweden – then the tax will raise EUR20 billion, well below the EUR34 billion estimated by the European Commission.
Sovereign borrowing costs would also be inflated, with a significant reduction in market liquidity that exceeds Brussels’ forecasts, undermining efforts to bring down government borrowing costs in the wake of a period which has seen a string of EU states being forced to seek international bail-outs, the authors of the report opine.
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By GlobalDataThe proposals from Brussels, which are supported by 11 Eurozone countries, would impose a 0.1% levy on stock and bond trades and 0.01% tax on derivatives transactions involving one financial institution with its headquarters in the tax area, or trading on behalf of a client based in the tax area. The FTT is due to come into effect on 1 January 2014.
