Šemeta wants ‘FAT’ tax to rein in European banks

Financial activities tax presents ‘fewer’ obstacles.

The European Commission will next week reject calls from some member states for the EU to promise a tax on financial transactions without waiting for a global agreement.

Algirdas Šemeta, the European commissioner for taxation, will present a policy paper on 7 October that is expected to say that the EU should opt instead for a financial activities tax (FAT), ahead of a financial transactions tax (FTT), because the introduction of an FAT would present fewer practical obstacles.

The EU pushed at a summit of the G20 group of developed and emerging economies in June for agreement on a global FTT, but the idea generated little enthusiasm among other G20 members. The EU is to make a second attempt at the next G20 summit, in November.

But Šemeta’s message will disappoint the governments of France and Germany, which believe that the successful introduction of an EU FTT is technically possible, and that Europe should be prepared to go ahead on its own, if necessary. Austria, Finland and Greece have also expressed support for the idea.

Tax options

The Commission prepared a detailed working paper on financial-sector taxation for a ministerial discussion on the issue that took place on 7 September. The paper examined various options for introducing either an FTT, or an FAT, at EU level but did not pronounce on the desirability of either option.

Commission sources said that the policy paper would not be finalised until after a two-day meeting of EU finance ministers that begins today (30 September).

They said, however, that comments made on Tuesday (28 September) by José Manuel Barroso, the president of the European Commission, indicated the direction of the Commission’s thinking.

“The Commission will present proposals for taxing financial activities,” Barroso told a financial conference.

He said that, in parallel, the EU would continue to discuss “a global financial transactions tax with our international partners”.

Concern about competition

The Commission and several member states (including the UK, Spain, Sweden and the Netherlands) are concerned that introducing an FTT at EU level might displace trading activity outside Europe. The European Central Bank has also expressed serious doubts about an EU FTT.

An FTT would tax trading in shares and bonds, and possibly also derivatives. Supporters of the tax argue that it would reduce market volatility, by deterring people from making spurious trades, while raising money that could either be used to repair damage done to public finances by the economic crisis, or to fund important societal causes such as supporting international development or fighting climate change.

Excess profits

A FAT, by contrast, is targeted at the ‘excess profits’ that banks make, with the help of cheaper borrowing rates because investors assume that governments will act to rescue banks from collapse.

Christine Lagarde, France’s finance minister, said earlier this month that she had not seriously considered the idea of an EU FAT, because it seemed too similar to France’s existing plans for a bank levy, rather than an additional measure.

The German government has included revenue from a financial-transactions tax into its budget plans for 2011. It believes such a tax could raise €2 billion each year for the state coffers.

Nicolas Sarkozy, France’s president, last week told the United Nations’ general assembly that the international community should introduce a transactions tax.

“Finance has globalised, so why should we not ask finance to participate in stabilising the world by taking a tax on each financial transaction?” he said.