The U.K. Treasury is speaking out against a plan proposed by the European Union to tax financial transactions. The plan, which would take effect in 2014 and raise about 57 billion euros a year, would set minimum tax rates for financial transactions throughout the EU’s 27 member nations. Today’s proposal would apply a tax of 0.1% on the trading of stocks and bonds, and a 0.01% rate on derivatives contracts.
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The U.K. Treasury said today that such a levy would need to be applied globally, and that “there are a number of practical issues that need to be worked through.” European governments are split over the proposal, which requires the unanimous support of all 27 EU nations. If no agreement can be reached, Belgian Finance Minister Didier Reynders and Spanish Finance Minister Elena Salgado said that the 17-nation euro zone might consider introducing their own tax.
“There are clear benefits of the proposal for the United Kingdom,” said EU Tax Commissioner Algirdas Semeta. “It will give additional revenues to our member states including the United Kingdom. Many member states need consolidation efforts and these additional revenues would be also beneficial for the U.K. At the same time, it would reduce the contribution of the United Kingdom to the EU budget.”
The new tax would be applied to banks, investment firms, pension funds, insurance companies, stockbrokers, hedge funds, and currency derivative contracts, among other types of financial institutions and transactions, though spot foreign-exchange trades would not be covered by the tax. Transactions with the European Central Bank and any other central bank would also be exempt from the tax, which also includes an exemption for the “primary market,” which includes sovereign and corporate bond auctions. All in all, the tax could cover roughly 85% of all transactions between financial institutions in the European Union.
EU member nations will discuss the proposal ahead of a Group of 20 summit in November, where the European Commission will present the plan, which includes downsides like a “long-run” negative impact of 0.5% of gross domestic production. The tax would also affect market behavior and financial industry business models like high-frequency and automated trading. In announcing the proposal in Strasbourg today before the European Parliament, European Commission President Jose Barroso said, “It is time for the financial sector to make a contribution back to society.”
Both Oxfam International and Catholic Development Agencies support the plan, which they have said would increase justice and provide funding for environmental and social goals, while U.S. Treasury Secretary Timothy Geithner has spoken out against the proposed transaction tax, saying it could create “frictions” that would worsen the impact of the crisis without reducing volatility or risk-taking. “I don’t think they’re the most effective way to contain leverage, or limit leverage, and I think most evidence suggests that they probably damage liquidity, that they undermine depth in markets, which is valuable in a crisis,” said Geithner.