New Direction – The Foundation for European Reform
Brussels, Tuesday 30 July: Europe?s Financial Transaction Tax, to be imposed by eleven EU countries next year, could cost up to 640,000 jobs, according to new research.
While the European Commission reckons the tax will raise ?34 billion, this figure does not take account of the significant negative impact of the tax, particularly in jobs lost both within the participating states and beyond, says the report.
The study, by Brussels think tank New Direction, uses the EU?s own economic models to measure the possible employment losses.
The Financial Transaction Tax is becoming increasingly controversial, with the UK government issuing a legal challenge and even the French Government demanding large scale changes to the tax earlier this month.
The Real Economic Impact of a European Financial Transaction Tax calls into question the EU?s own analysis of the tax, saying that it ?wishes away? any downsides to the measure with a series of na?ve and optimistic assumptions about how the money would be spent.
Estimated impacts of FTT imposed in each Member State
Member State Employment Losses
Other EU27 (mostly UK) 65,000
Source: Eurostat modelling
To read the report, click here.
Report in brief:
The European Commission has adopted a proposal to implement a common European tax on financial transactions through the enhanced co-operation of eleven member states.
The aim is to seek a contribution from the financial sector to repair public finances damaged by the financial crisis.
But applying Eurostat modelling shows that the loss of output in the financial services industry will have knock-on or multiplier effects throughout Europe?s economy, inflicting a loss of around 641,000 jobs.
The Commission?s impact assessment of the FTT fails to take this into account and relies on unsubstantiated assumptions about how revenue from FTT would be used.
Even so, the European Commission describes the tax as ?the third-best solution? and enhanced co-operation as a ?last resort solution?.
In recent weeks and months the FTT proposals have been subjected to increasing criticism, not least from governments previously committed to the scheme.
The Commission estimates that the annual revenues raised are likely to be in the order of ?34 billion across the EU11 (around 0.4% of GDP).
It is likely the proposed tax would double current taxes on capital. The tax is projected significantly to influence the structure of the financial services industry with activity in some markets expected to fall by around 75%.
Additionally, as the tax will fall on government bonds, this implies an increase in costs for public budgets of around ?3.8 billion for the EU11. The current proposals are also seeking to cover regional development banks, increasing the cost of public finance yet further
The Commission admits that taxing transactions that raise capital for investment ? ? could have negative knock-on effects on growth and jobs and the overall competitiveness of the economy.?
However, the impact assessment suggests that if the revenues were used for debt reduction, tax cuts or productive public investment the net impact of the tax would be neutral or even positive.
But raising taxes on the productive economy is not an appropriate policy for deficit reduction.
Tax cuts on labour or corporates are unlikely given the circumstances, and capital flight from the FTT would undermine their effectiveness.
Policies raising taxes to increase public investment do not have a strong record.
The impact assessment also attempts to justify the tax by closing the ?fairness gap?, citing the economic cost of social tension and political instability. However, a wide range of economic policies could be justified or discredited on the likelihood of social unrest.
The employment impact of the FTT cannot be ignored. This includes job losses within the financial services industry and also suppliers within computer services, legal and accounting services.
In summary the costs of implementing this policy will reduce economic growth, investment and job creation. It will be difficult to repair public finances when the additional sources of income include government bonds and regional development banks. This involves governments effectively taxing themselves. The tax revenues are uncertain and may be undermined by activities relocating outside of the EU11 or outside of Europe altogether.
The Commission needs to do much more work justifying a potentially disastrous loss of employment and output from the FTT.
New Direction – The Foundation for European Reform is a free market think-tank established in Brussels in 2010 to add innovative ideas and encourage reform efforts in Europe. Together with a strong network of partner think tanks around Europe, New Direction produces original and relevant research papers focusing on the most pressing issues in the area of economic growth, competition, financial regulation, energy security, taxation, agricultural policy, bureaucracy and EU institutional affairs.
4-consulting is an independent consultancy based in the EU specialising in the evaluation and appraisal of economic policies for governments, agencies and private sector clients across Europe. It has completed research assignments for central and devolved governments, the European Commission, trade bodies and development agencies. Its work is regularly cited by those involved in the development of economic policy such as the World Bank and OECD.