Assessing the economic impact of financial transaction taxes

The banking and financial crisis of recent years has led to a broad debate on financial regulation to improve the resilience of the financial sector and reduce the likelihood of further crises. Given the costs that rescuing financial institutions has inflicted on taxpayers, the call for a contribution from the financial sector to the financing of crisisintervention costs has also gained political voice and support. The European Commission issued in September 2011 a proposal for an EU-wide financial transaction tax. The aim of the proposal is to ensure that financial institutions make a fair contribution to the costs of the recent crisis, to create disincentives for socially unproductive transactions, and to avoid fragmentation of the internal market by uncoordinated measures at national level. (43) A number of Member States have expressed their interest for such a tax. Eleven of them have submitted a request to the Commission (or are about to so) for a proposal to introduce a financial transaction tax via enhanced cooperation. The Commission proposes levying the tax on a broad set of secondary-market transactions (shares, bonds, derivatives), but excludes refinancing operations with central banks, most day-to-day transactions of private households and businesses (insurance contracts, mortgage lending, consumer credit, payment services) and currency transactions. The purpose of a broad tax base is to prevent potential tax evasion via the creation of alternative instruments as well as to contain negative liquidity effects in certain parts of the market. A broad tax base also allows raising substantial revenue at low tax rates. There is little public finance literature on the regulatory merits and the revenue potential of financial sector taxation to date, (44) but the policy debate has also renewed academic interest in this (43) European Commission (2011), ëProposal for a Council Directive on a common system of financial transaction tax and amending Directive 2008/7/ECí, COM(2011) 594. Several Member States (e.g. Belgium, Italy, UK) already have transaction taxes on certain types of financial operations. See Brondolo, J. (2011), ëTaxing financial transactions: an assessment of administrative feasibilityí, IMF Working Paper, No 11/185 and Matheson (2011), op. cit.. (44) Keen, M. (2011), ëRethinking the taxation of the financial sectorí, CESifo Economic Studies, Vol. 57, No 1, pp. 1-24. field. Like the Commission proposal, empirical and theoretical research frames the debate along two main dimensions, namely the regulatory merits of transaction taxes and potential sideeffects on capital costs, investment and output.