Paris, 12 April 2011
Response to the consultation on Financial Sector Taxation
To:Commissioner ŠemetaEUROPEAN COMMISSION
DIRECTORATE-GENERAL TAXATION AND CUSTOMS UNION
Direct taxation, Tax Coordination, Economic Analysis and Evaluation,
Company taxation initiatives
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Identification of the stakeholder
Nom, prénom et adresse: Vincent PEILLON
European Parliament 14 G 253
60 rue Wiertz
B 1047 BRUXELLES
BELGIQUE
Contact email:
Activité: Member of the European Parliament
I am not recognized European social partner organisation or a representative of a European social dialogue committee.
I do not object to the publication of personal data on the grounds that such publication would harm your legitimate interests.
I agree to have my response to the consultation published along with other responses.
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Q1: Do you consider it justifiable that the revenue side of fiscal consolidation efforts of Member States are targeting the financial sector?
Answer 1. Yes, because the crisis was clearly caused by the financial sector and it has had a devastating impact on the real economy. Simultaneous fiscal consolidation in all member states focussing only on expenditure cuts could severely increase the risk of a debt deflation spiral in Europe. Above all, we need to fight speculation and ensure the recovery of the real economy, by returning the financial markets to their original role of providing sources of capital to companies and to serve the general interest.
As recognized by the European Commission in its October 2010 Communication on taxation of the financial sector and made plain clear in the European Parliament’s Podimata report adopted on 08 March 2011, there are three main reasons why the financial sector has to pay its share to the cost of the crisis. First it bears responsibility for the financial crisis through excessive risk-taking activities and structures and creating discrepancies between the volume of financial transactions and the real needs of the economy. Widespread moral hazard has also played a significant part. Second, public interventions to rescue the sector have created deep strains on public finances that translate into cuts in public service jobs and pay in a majority of EU member states, deterioration of public services and social protection. Third, it is undertaxed compared to other sectors.
Sustainable economies are based on solidarity through redistribution of revenues - not the socialization of losses and the privatization of profits. This is why the revenue side of fiscal consolidation efforts of Member States should target the financial sector, where there is a concentration of money and profits, rather than wages.
Income inequality has widened dramatically over the last three decades and the wage share in GDP has constantly decreased in at least 20 of the 27 European member States. Profits exploded while the rate of growth remained almost constant. Profits have been reinvested in the financial sector, leading to an increase of the share of financial profits on total profits and to excess savings. These savings have been used to fuel bubbles, while public budgets and the lower income receivers have been driven into ever higher levels of debt.
Q2: Do you find it problematic that Member States introduce patch-work national measures without coordination?
Answer 1: Existing national measures relating to the financial sector provide a good basis that need to be built upon to establish an EU wide taxation. Other reasons for further coordination include:
•First, there is no real internal market without a common taxation policy. There is a very high level of European economic integration, which implies supervision and regulation as well as coordination of taxation at European level.
•Second, without common regulation regulatory arbitrage between different European Trading places will further increase and thus increase financial instability. This will also facilitate fiscal dumping and probably make impossible a significant taxation of financial sector. And last but not least, it is important to ensure a level playing field because similarity in tax system for cross-border financial institutions will simplify business for these financial institutions.
•Last, the coordinated action by member states to support banks along with the introduction by the Commission of crisis-specific State aids rules prevented the collapse of the financial sector. According to the Commission’s State aid scoreboard, between October 2009 and 2010, the volume of national support to the financial sector approved by the Commission amounted to € 4.5 trillion, of which the amount actually taken by banks in 2009 is around €1.1 trillion. This surely justifies coordinated action on taxation.
The European institutions should introduce Europe-wide taxation with the Commission actively promoting it. Otherwise, under the enhanced cooperation procedure of the Lisbon Treaty, groups of member states that go ahead could sideline the Commission.
Responsibility for the crisis
Q3: Do you consider that shortcomings in the governance or behaviour of financial markets or financial institutions were one of the major reasons for the financial and economic crisis?
Answer 2: Yes, this was one of the major reasons for the financial and economic crisis. However, governments too have to take their share of responsibility. The too far-reaching deregulation of the financial markets and the lack of efficient and coordinated supervision were key factors in the development of the crisis.
Financial crises are part of a larger picture. Indeed, the last 20 years have been dominated by efficient market theory where market deregulation, small state, and wage deflation were considered as being favourable to employment and any intervention in economic affairs was seen as destabilising. All this deregulation and financialisation of the economy, coupled with unchecked financial innovation, allowed higher profits and higher rates of return, notably in the financial sector. As entrepreneurs, people transferred their capital to this sector leaving aside investment in the real economy. Given the capital intensive character of financial sector activities, this was accompanied by an increase in unemployment.
Q4: Which sectors and activities within the financial sector had to do most with the crisis?
Answers 1 - 6: Both the traditional banking sector and the investment banking sector with its system of shadow banking contributed to the greatest extent to the crisis. The crisis has a systemic character and there is not a single explanation for its origin. The entire process of financialisation, which emerged in the last three decades has established a fragile system which had to collapse sooner or later. The crisis has revealed extremely bad management behaviour and risk management in the whole sector. Short-comings in governance were certainly a key factor, in particular bad management, deregulation (in particular that the shadow-banking was allowed), wrong incentives, bad risk culture and risk awareness and insufficient supervision.
Q5: Do you consider those shortcomings in the governance or behaviour of financial markets or financial institutions to be an EU-wide problem?
Answer 1: Yes, the economic crisis affected all Member States of the EU, as bad governance in one country affects markets in general and thus has consequence for other countries. National financial systems have been hit to varying degrees.
Under/over-taxation
Q6: Do you consider the financial sector in the EU to be under-taxed (e.g. because of VAT exemption, exemption from thin capitalization rules, higher economic rent i.e. excess profits) or overtaxed (e.g. because of special additional taxes already implemented) with respect to other sectors of economic activity?
Answer 1: The financial sector in the EU is clearly under-taxed, for the following reasons:
•Throughout the EU, effective corporate taxes paid in relation to profits are disproportionately low. This is affected by balance sheet structuring options, tax exemption of foreign currencies on the basis of the parent/subsidiary regulation and group taxation.
•Security transaction taxes were abolished in many countries. All other sectors have such transaction taxes for goods and services.
•In many states, capital gains are not taxed at normal income tax rates, but at significantly lower levels, e.g. in France, Austria, Germany, the Netherlands. This represents an unjustified tax privilege for higher incomes and goes counter the principle of progressive taxation.
•The EU VAT system ensures that the net value added of the banks remains mainly untaxed.
To counter the structural imbalances in our economies, progressive taxation is more important than so-called "over-taxation" and "under-taxation”.
Q7: Which sectors and/or activities within the financial sector do you think are most under-taxed/over-taxed?
Answers 1. - 5.Due to the reasons mentioned under Q6, investment banks and hedge funds based in the EU are the most tax-privileged. However, the greater problem is that many of these banks and funds are based in tax havens, which means that they are almost completely exempt from income taxes. So far, drying out tax havens, which geographically belong to Europe, has not yet been attempted seriously by policy.
4.2. Taxation as a relevant measure
Q8: What do you think of tax measures, versus regulatory measures and levies (connected to the financing of funds to ensure the proper resolution of financial institutions)?
Answer 3: Tax measures should not be opposed to regulatory measures - they are complementary. Both can reinforce one another. We strongly support a mix of both to achieve sustainable reforms and avoid another financial crisis and massive public bail out.
The actual purpose of taxes is to generate public revenue to finance public services that are essential to citizens and the economy, contribute to a fair distribution of wealth and income across society, and help meet global challenges such as poverty and climate change. The EU Financial Transaction Tax (FTT) can be achieved as simply as possible, with as much distributive justice as possible. The understanding, for example, that the financial sector is under-taxed and that it should contribute to the revenue side of the consolidation efforts, is a reason to impose a financial transaction tax.
The regulatory effect of taxes does exist. For example, imposing a European FTT on high frequency trading will significantly reduce the volume, although it cannot eliminate high-risk financial transactions. Derivatives, which are detached from the underlying transaction and only have speculative character, short sales, Asset Backed Securities, Credit Default Swaps are high-risk transactions in any case, which require regulation and supervision.Consequently, although a European FTT would have a positive regulatory effect, it must be accompanied by stronger and stricter regulation in order to correct the weaknesses and flaws of the European financial sector.
Q9: Do you consider that an FTT or an FAT could lead to cumulative social and economic effects in combination with any of the ongoing regulatory reforms in the financial sector, including the banking levy (see COM 2010(301)final) ?
Answer 1 : Yes, because budget deficit problems and national debt problems exist in most European countries and more will arise in future and because the simple question is how they can be tackled and who should contribute to finance them. It is necessary that the contribution has no or hardly any negative impact on growth and employment. In this respect we believe that a FTT will actually lead to further growth and employment by curbing speculation that has a direct negative impact on the economy. According to the analyses of the OECD, this would be the case with regard to wealth-related taxes compared to other forms of taxation. Compared to reducing social transfers, wealth taxes definitively have a lower social impact and also a lower negative effect on growth. Compared to a classic wealth tax, the Financial Transaction Tax has a low capital-damaging effect. Concerning the tax rate of 0.05%, as called for by the European Parliament, capital increases by companies or the accumulation of long-term savings capital are hardly affected, in contrast to speculative high frequency trading.
4.3. Financial transaction tax (FTT)
Q10: At what level do you think that the FTT will be most effective?
Answer 1: It should be introduced at European level. Of course it is desirable to introduce the Financial Transaction Tax at global level and the best way of achieving this is to start at EU level.
Indeed, introducing the FTT at global level does not look achievable in the short term unless a relevant economic area - such as the EU – takes the lead paving the way for further implementation. Historical experience shows that taxes are not introduced on a transnational basis; someone has to lead and the others follow. This was the case for all EU-wide harmonised taxes. In a globalised world, the EU could assume the pioneering role, which was previously adopted by the national states. Experience has shown that if well designed, the relocation effect could be very limited.
Moreover, there is evidence that the increasingly short-term oriented, non-fundamental speculation contributes strongly to the overshooting of asset prices. A small FTT would then dampen the volatility of asset prices over the short run as well as the magnitude of the swings over the longer run. And last but not least, speculative funds have such a business model, that they make lots of profit by trading very high volumes at high frequency with very low profitability.
Q11: Do you think that a broad based financial transaction tax is a viable instrument?
Answer 7: Yes. A FTT with a broad tax base is necessary to ensure that all financial products make an adequate contribution.
It makes sense to apply the Financial Transaction Tax to trading with all securities and derived products (derivatives), including OTC transactions, to prevent evasion to other classes of assets.
Q12: What do you consider as an appropriate connecting factor for the place of levying of the tax?
Answer 3: The tax must be constructed as a legal transaction fee for the order to buy a financial product. If the buyer has unlimited tax liability in the EU, the tax effect will occur; the tax effect will also occur if the buyer does not have unlimited tax liability in the EU, but the seller does (principle: one-off taxation of all transactions with EU-reference). If the order is carried out via a financial institution or via a securities trader based in the EU and if cash is involved here too, tax has to be paid; otherwise the buyer has to declare. As the major part of the transaction volume is affected by institutional buyers and as these are normally not in the habit of evading taxes, the occurrence of such tax constructed in this way is also secured. It is technically possible to introduce an FTT and there are different options:
•With the centralized approach, the FTT is collected according to the”territorial principle”, i. e., all transactions within a certain jurisdiction are subject to the tax. The tax is deducted at the point of settlement, i. e., at the exchanges or at CCPs (central clearing counterparties) in the case of OTC transactions, as provided for in the upcoming regulation on OTC (Over the Counter) derivatives. There are two preconditions for the realization of this approach. Firstly, clearance of OTC transactions via CCPs is mandatory and, secondly, all EU countries introduce the tax. Due to the concentration of transactions on few financial centers, tax revenues would need to be fairly distributed.
•With the decentralized approach, the FTT is collected according to the ”personal principle”, i.e., the debtors are the residents of an FTT country who order a financial transaction. The tax is deducted by banks (and brokerage firms) receiving and processing the order (Schulmeister, 2011).
Q13: Do you think that the value set for the underlying is (in general) a correct tax base for derivatives?
Answer 3: Yes, because it is the easiest way to find a clear tax base for certain forms of derivatives.
Q14: Do you consider that there would be a risk of financial engineering around the broad-based or narrow-based FTT that would undermine the objectives of the measure?
Answer 5: Every time a new substantial tax is proposed, the industry will try to find a way to avoid it. In addition to a well designed tax, it is important to provide adequate resources to tax collection and tax control services to prevent tax fraud and evasion.
Q15: What do you think of the FTT designed as a cumulative tax, i.e. every subsequent sale is taxed at the full amount of the transaction without any deduction of previously paid FTT?
Answer 1: It is the categorical purpose of the European Financial Transaction Tax also to include cumulative trade and to reduce its volume. Insofar, there cannot be any exceptions.
Q16: Would there be a need for specific exemption of certain transactions from the FTT or an exemption threshold?
Answer 3: For the sake of simplicity, no exemptions should be made. If thresholds are to be introduced, a refund system could be devised through the annual income tax collection.