EU financial transaction tax draft directive: backing Osborne into a corner?
The EU’s draft directive for a financial transactions tax to come into force at the start of 2014 was leaked this morning. It is due to be discussed at the EU Finance Ministers meeting in Brussels on 4 October, and it is generally a good proposal which will be warmly welcomed by campaigners for a Robin Hood Tax (there are some devils in the detail, however – see below).
Backed by the French and German governments, its main enemy will of course be the British government: and there is much in the draft directive that will make George Osborne’s life difficult. You might also think it had been written with precisely that end in mind.
First off, the stated objectives of the measure, which an impact assessment (unseen) argues will be undeniably progressive, are spot on. Point 1 of the preamble is worth quoting in full:
The recent financial crisis has led to debates at all levels about a possible additional tax on the financial sector and in particular a financial transactions tax (FTT). This debate stems from the desire to make the financial sector contribute to covering the costs of the crisis which it is often seen to have caused and to even out the taxation of the sector vis-a-vis other sectors; to dis-incentivise overly risky activities by financial institutions [high frequency trading is specifically targeted]; to complement regulatory measures aimed at avoiding future crises and to generate additional revenue for general budgets or specific policy purposes.
The proposal aims to reduce the scope for avoidance (egrelocation of financial activities or institutions) by – inter alia – covering a wide range of transactions, a residence principle so that if any party to a transaction is located in the EU the transaction is taxable, and starting with a very low tax rate (though none is specified in the draft). That is all very sensible – as is the exclusion of primary markets in securities and currencies.
There will be campaigners who are disappointed by the Commission’s proposal to start with a low tax rate, because this will minimise the revenue raised. But I think the Commission is right. As well as making avoidance less likely, a low tax rate to start will allow us to identify other, unforeseen problems, and correct them before too much damage results. But probably the main argument is that it is more difficult to introduce a new tax than it is to raise an existing one: we should be patient, and see if the tax can be implemented, before asking for more.
The other two concerns are about which countries are covered, and where the money goes, and in both cases, I think there are huge bear traps being laid for George Osborne – although one has sufficient honey smeared over it that he might be tempted to take the pain.
Who will be covered? At the moment, the Commission is proposing that the tax could be introduced under Article 113 of the Treaty, which requires unanimity. The main opponents are the Czech Republic, Sweden and the UK. The first two could probably be swayed (the Swedes in particular are scarred by their experience of a faulty FTT in the 1990s, but the Commission is proposing something that addresses the problems they faced), but the UK is more challenging. The French and German governments, like others around the table, are committed to moving forward with less than unanimity under enhanced co-ordination, which only requires 9 or more countries to be involved and would probably means dropping currency transactions (although unanimity among the eurozone countries might be an option). But the Dutch government want to play hardball with the UK and others may too. Why, they say, should we let the UK off the hook without pressuring them to come on board and make the tax more comprehensive and more lucrative. So the legal basis, while it provides him with a potential veto, puts Osborne on the spot: and his veto is undermined by the alternative possibility presented by enhanced co-operation.
Where will the money go? All summer, campaigners and sceptics have been worried that the Commission wants the proceeds of an FTT for themselves, and they probably do – but no one is going to let them have it, so the Commission have come up with a compromise. Any money raised by the FTT could be offset against member states’ budget contributions, which in effect means that the money goes to them to do with it as they wish, but expressly relieving them of the burden of paying for the EU budget. For Osborne, this is the honey trap – he would be able to repatriate a budget contribution that has been a political totem since Margaret Thatcher’s famous handbagging of the EU in the 1980s – but he would have to implement the tax, and would give up some of the leverage that the budget contribution gives him over what the EU does with it.
Development campaigners and climate change activists are, of course, still rightly concerned that money raised in this way would not be spent on relieving poverty, or combating climate change, in the global south, but the preamble quoted above does refer to “additional revenue for general budgets or specific policy purposes” (my emphasis), so there would still be all to play for after the tax is implemented. That indeed is part of the Franco-German deal that led to this rather nifty draft directive, leaving the decision on what to spend the money on until after it is in the bank.