The Robin Hood tax: take from everyone and give to the EU

The European Parliament today backed calls for an EU financial transaction tax (FTT). MEPs say that their version of the FTT comes with at least two great merits:

- it’s a simple way to raise revenue
- it brings the financial sector to account and deter short selling.

MEPs, we suspect, feel that targeting greedy bankers is the only way to sell an EU tax to an increasingly sceptical public - EU tax proponents is a minority cult. So in the minds of MEPs, two negatives equal a positive. Right?

Wrong.

First, the idea that an EU financial transaction tax could feed straight into the EU budget, as MEPs propose, is fiction. For one, the complexity of financial transactions and the difficulties involved in working out a sensible burden sharing arrangement between member states with massively different levels of financial activity - as well as a fair methodology for deciding what, exactly, should be taxed - make it wholly inappropriate as a tool for funding the EU budget. This is particularly true as greater simplicity and transparency are often cited as key reasons for introducing an EU tax (as opposed to the current - and admittedly complex - system, which combines VAT receipts, contributions based on GDP and 'own resources').

In the absence of a burden sharing mechanism, the impact of an EU financial transaction tax on the UK will be absolutely massive, given the City of London. Both directly, but also indirectly, as many financial transactions taking place outside the UK, are still linked to activities in the City in one way or another.

MEPs say that they hope to raise £20bn in the UK through a transaction tax, but this estimate seems, quite frankly, to be plucked out of thin air. Using MEPs' own methodology (which isn't really a methodology at all to be honest) the burden on the UK is more likely to be between £40bn and £180bn.

Data on financial transactions are as patchy and opaque as the EU institutions themselves, which make it very difficult to nail down what kind of figures we're talking about.

But the World Federation of Exchanges, for example, put the level of financial transactions in the UK at £600tr (for 2009). This would put the impact of the tax at between £60bn (at an incidence of 0.01%, which is the lower end rate proposed by MEPs) and £300bn (at 0.05%, which is the higher end rate proposed by MEPs). If we limit the tax to just derivative, equity and bond trades – which MEPs have proposed - the impact falls to £40bn - £180bn (at same rates).

So, without any adjustments or burden sharing arrangements, the UK would send up to £180bn to the EU's coffers under this proposal! This will of course never ever happen, but it should serve as an illustration of how poorly thought through MEPs' proposal is.

Equally important, contrary to what MEPs seem to believe, this will not be an exclusive tax on rich Londoners or bad bankers. Instead, the cost will be passed straight down to consumers and the real economy (through higher borrowing costs and higher commodity prices, for example) - everyone will have to cough up.

Better regulation and carefully targeted taxes from national governments – or via global coordination – are much better options. As even the European Commission has admitted, with EU taxation commissioner Algirdas Semeta saying:

"With regard to a financial transactions tax at EU-level only, I firmly believe that it is premature to commit to such an option. In fact, taking into account the potential impact that this could have on European competitiveness, it would be irresponsible to proceed with such a tax"

There is also the significant question mark over where, how and why this additional money will be spent. Somehow we don't take huge comfort in the thought of MEPs all of a sudden having billions in extra cash to play around with.

In any case taking from a large tax base and redistributing the money to a very small EU elite - which operates several levels removed from citizens - doesn't sound very Robin Hood-like.

EU tax: the reactions from around Europe

EU Commissioner Lewandowski hasn't exactly hit a home run with his comments about the Commission's forthcoming proposals for an EU tax.

The idea was outright rejected by the German government, which pointed out that its coalition agreement stated: “We reject an EU-tax or the involvement of the EU in national tax and duty collection.” A spokesperson from the German ministry of finance told today’s FTD that “Nothing has changed in this stance.”

As expected, the British government also gave the idea the cold shoulder, with Treasury Minister Lord Sassoon saying that the British Government

“is opposed to direct taxes financing the EU budget. The UK believes that taxation is a matter for member states to determine at a national level and would have a veto over any plans for such taxes.”

Also France, which in the past has advocated fiscal centralisation and an EU tax, doesn't seem particularly impressed. “We judge this idea of a European tax perfectly ill-timed,” said France's junior minister for Europe, Pierre Lellouche. “Any extra tax is currently unwelcome. It is much more the time for the member states and also European institutions to make savings.”

Okay, it's not the idea of transferring fiscal sovereignty but the timing that rubs Monsieur Lellouche the wrong way, but still.

But Lewandowski does have some supporters. A spokesperson for the Austrian Minister of Finance Josef Pröll, for exampe, tells Die Presse that

“if we use [a financial transaction tax] as a source of finance for the EU, it eases the burden for net contributors. Whether the financial transaction tax goes into the domestic budget or is used for the refinancing of the EU or a small amount is transferred to the EU is not that important”.

Having previously confirmed his commitment to a financial transaction tax his support was somewhat expected. Spanish Prime Minister Zapatero also said he would consider a concrete proposal from the Commission “with interest” and “maximum attention,” if “the idea behind it is strengthening the European Union,” reports EFE.

Media reactions haven't been overly positive either (at least from the Big Three). Einar Koch, Chief Correspondent of German tabloid Bild, exclaims "EU tax, no thank you!” He argues that “The EU desperately needs structural reforms in its expenditures instead of new sources of revenue.” Another attack comes from Dutch MEP Derk-Jan Eppink who says that the proposals should be fought “with fire and sword,” according to Standaard.

"More money from less citizens?" asks Clemens Wergin in Die Welt. He points to Europe’s shrinking population and the apparent failure in Brussels “to understand [the] basic correlation between demographic trends and governmental expenditures.”

A commentary in Focus at last finds something positive in a potential direct tax. Giving the European Parliament a say in tax jurisdiction would force MEPs to justify the added burden of additional expenditure to their constituencies. This could actually cause the parliament to take its role of budgetary oversight seriously, instead of constantly propose spending increases to fund their own pet projects. An interesting thought.

Judging from these reactions, Brussels latest attempt at grabbing fiscal powers will last about as long as England in the World Cup. But this being EU politics, we doubt the idea will go away so quickly. As we've noted before, there's a dangerous temptation for the net contributing member states here, which Lewandowski is trying to exploit and test (with limited success so far).

Brussels specialises in repackaging and rebranding ideas (but with the substance unchanged), in order to overcome opposition.

Let's wait and see until Lewandowski has actually tabled his proposals. The outcome is still far from clear.

EU-tax back on the agenda

Today's FT Deutschland splash reveals that EU Budget Commissioner Janusz Lewandowski will in September table different options for introducing an EU tax to fund the bloc's budget. Apparently, Mr. Lewandowski believes that the current drive in Europe to cut spending is making governments more receptive to the idea of a single tax.

He said,

Many countries want to be unburdened. In this way, the door has been opened to think about revenues that are not claimed by finance ministers...If the EU had more of its own revenues, then transfers from national budgets could be reduced. I hear from several capitals, including important ones like Berlin, that they would like to reduce their contribution.

The thinking is that if the Commission raised its own taxes, then the burden on member states' budgets would be reduced, and member states would pay 'less' to the EU.

This logic is of course fundamentally twisted as the burden on taxpayers - which surely is what matters in the end - would be exactly the same. Only thing that would change is the layer of government that raises the taxes. The Commission is effectively trying to play on governments' desire to be seen as cutting spending as a pretext to concentrate taxation powers in Brussels. The views of taxpayers - the folks who will actually pay for this - are simply ignored.

Pretty disingenuous.

According to Lewandowski, possible sources of an EU tax include a financial transaction tax, levies involving the Emissions Trading Scheme and/or a levy on air travel. EUobserver reports that the Commission hopes that a deal on an EU-tax can be reached during the Danish Presidency in 2012.

Unsurprisingly, Lewandowski's comments have already provoked pretty strong reactions, with German Finance Ministry spokesman Tobias Romeis telling reporters in Berlin that, "Calls to introduce an EU-tax are in opposition to the position the government established in its coalition treaty, in which it says that we will deny an EU tax or EU involvement in national taxes."

So the German coalition government says it will oppose an EU tax, but what about the British one?

This would seem like an obvious one for the Coalition to squash given that it represents a massive step towards a federal Europe. But you can also see the temptation.

A direct EU tax on, say, financial transactions or travel is easier to 'hide' than a line in the annual budget. The problem is that the UK's contribution to the EU is going up all the time - despite the almost universal belief in Britain that the EU budget is exceptionally poor value for taxpayers' money. The UK's net contribution is projected to rise to £10.3 billion in 2014/15 (according to the Coalition's June budget), meaning that in a decade, the UK's net contribution has increased by around 230%.


This continuous increase has become a bi-annual embarrassment, which any UK government would like to put an end to (particularly when everyone is talking austerity). Creating an arrangement under which the UK's EU contribution actually doesn't show up in the budget would do the trick.

In the end, though, it's very unlikely that the Coalition would be able to pull it off even if it wanted to - particularly as it has to get around its pledge to hold a referendum on transferring powers to the EU. And let's remember, most of Cameron's Cabinet genuinely don't want an EU-tax for a range of reasons, including ones relating to ideology and democracy.

This debate will most certainly drag on.