Financial Transaction Tax: European Union Report

Lord Harrison Excerpts

Wednesday 11th July 2012 Grand Committee

Moved By

[Lord Harrison]

That the Grand Committee takes note of the Report of the European Union Committee on Towards a Financial Transaction Tax? (29th Report, Session 2010-12, HL Paper 287).

[Lord Harrison]

My Lords, I am delighted to have the opportunity to introduce this debate on the report of the European Union Committee entitled Towards a Financial Transaction Tax? This report was based on work undertaken by the Sub-Committee on Economic and Financial Affairs, which I chair. The report was published in March and was based on evidence received from campaigners, representatives of the financial sector, academic experts, think tanks, MEPs, the Financial Secretary to the Treasury Mark Hoban MP and Algirdas Semeta, the EU Commissioner for Taxation and Customs Union, who appeared before the committee in February. I also thank all our witnesses who contributed to this inquiry and my clerk, Stuart Stoner, for mastering, as ever, a complex subject with consummate skill.

Since the global financial crisis erupted in 2008, there has been a continuing debate about the role of the financial sector within the economy. As recent events here in the UK have again brought into focus, many have criticised the perceived light-touch regulation of financial practices and of the markets. There is also a common perception that the financial sector does not pay its fair share, as well as widespread anger at the level of pay and bonuses in the sector at a time of economic austerity. In this context, there is an understandable desire to see the financial sector make amends for its perceived mistakes and shortcomings.

The proposal for some form of financial transaction tax is nothing new. Indeed, were the noble Lord, Lord Skidelsky, here, he would doubtless tell us the thoughts of John Maynard Keynes in that direction. In the early 1970s, the Nobel Prize-winning economist, James Tobin, brought forward an eponymous proposal to levy a tax on every amount exchanged from one currency to another to reduce short-term currency speculation. The idea was not adopted at the time, but it has returned to the agenda on a regular basis ever since. In the aftermath of the recent financial crisis, the European Commission has been actively considering the case for a financial transaction tax, or FTT. In September 2011, it published its proposals for a tax on the value of single transactions of a broad range of financial instruments, including equities, bonds, currencies and derivatives. EU leaders including Germany’s Chancellor Merkel and the former French President Nicolas Sarkozy advocated such a tax, while the Commission President Jose Manuel Barroso promoted it as a question of fairness. A wide-ranging campaign, spearheaded by the Robin Hood tax campaign here in the UK, has also called for a tax in order to tackle poverty and climate change.

Yet support for an FTT is far from universal. Leading economists have criticised the proposals, and several world economic heavyweight Governments, most notably the USA, remain implacably opposed to its introduction. The UK Government, while stating that they do not oppose a global tax, have remained consistently opposed to its introduction at EU level. The Prime Minister has called the tax madness, and the Chancellor of the Exchequer described it as,

“a bullet aimed at the heart of London”.

Even after we have published the report, we are still getting information, for instance from the City of London Corporation. It drew its own analysis of the tax, highlighting concerns and worries, and concluded that:

“This is not helpful to the European recovery and the jobs and growth agenda”.

It was in this febrile atmosphere that the committee’s inquiry into the Commission’s proposals took place. We were disappointed in what we discovered. We found the Commission’s proposed model wanting in many respects and unlikely to fulfil the objectives that the Commission had outlined. We found key elements of the Commission’s model to be fundamentally flawed, and advised the Government that they should refuse to agree to the proposal.

Why did we come to such a stern conclusion? We began by examining the Commission’s five stated objectives. The first was to avoid fragmentation in the internal market for financial services; secondly, to ensure that financial institutions make a fair contribution to covering the costs of the recent crisis and to ensure a level playing field with other sectors; thirdly, to create appropriate disincentives for transactions that do not enhance the efficiency of financial markets; fourthly, to create a new revenue stream for the EU budget; and, fifthly, to contribute to the continuing international debate on financial sector taxation and, in particular, the development of an FTT at global level.

We were not convinced that the Commission’s proposals would meet any of these objectives. Given the opposition to an FTT in the USA, the suggestion that the Commission’s proposal would pave the way for a global tax was, in our view, wholly unrealistic. We noted that the case for using an FTT as a new revenue stream for the EU budget was contentious even among its own supporters, many of whom favoured revenue being put to other uses, such as tackling global poverty and climate change. While we found there was a stronger case for asking the financial sector to make a contribution to the cost of the crisis or, indeed, for seeking to deter certain capricious transactions, in neither case did we find the Commission’s arguments persuasive. While we acknowledged the strength of public anger directed against the financial sector and the widespread view that those who contributed to the current financial crisis should contribute to its clean-up costs, we found that this FTT was the wrong way to meet such demands.

We next considered the detail of the Commission’s proposals. We concluded that the Commission’s model was impractical and unworkable. For instance, the proposed residence principle, defined as taxation in the member state of establishment of the financial institution regardless of where the transaction took place, was subject to widespread criticism, including from advocates of an FTT. There was, in our view, a significant likelihood that a tax so designed would lead to financial institutions relocating outside the European Union in order to avoid the tax. Only an FTT implemented on a global scale would prevent EU-resident institutions being placed at a significant competitive disadvantage in comparison with other leading global competitors. Yet, for the reasons I have outlined, the chances of a global tax being introduced are extremely thin.

We also concluded that it was uncertain who would shoulder the burden of the tax incidence. We pondered what the impact would be on consumers who might have the tax passed on to them. In addition, although the headline rate of the tax was relatively low, there was a danger of a potential cascade effect increasing the potential tax burden by the tax being levied at each stage of the financial instrument’s journey.

Much criticism focused on the Commission’s impact assessment, which indicated that the proposals seemed destined to have a substantial detrimental effect on the EU-wide GDP. In the context of the current financial crisis and the economic pressures being faced by many member states, we found this undesirable. We concluded that if a proposal of such importance as this is to be seriously contemplated, it is imperative that any such proposed tax is as well designed as possible. In our view, the Commission’s proposal failed this test.

The consequences of such a poorly designed tax, both on the United Kingdom financial sector and the EU financial sector as a whole, could be very serious indeed. Divergent views were put to us concerning the potential impact. We found such uncertainty about the outcomes alarming and so, I repeat, we were deeply concerned that an EU-wide FTT could have a serious detrimental impact on the United Kingdom, in particular by giving financial institutions an incentive to relocate away, principally from London. We heard evidence that over 70% of the revenues from an FTT could come from the United Kingdom, and we questioned the appropriateness of a proposal that would have such a disproportionate effect and impact on one member state above all others.

The United Kingdom Government have made it consistently clear that they would oppose an EU-wide tax. Given that EU-wide taxation proposals require unanimity among member states, we found the likelihood of such a tax being introduced extremely remote. Speculation has therefore grown that an FTT might be adopted by a smaller group of member states centred on the euro area from which the United Kingdom would almost certainly stand apart. However, the impact of such a tax on the United Kingdom cannot be ignored. If, as is likely, a directive covering a smaller number of member states equates the UK with third countries, there would still be a significant effect on the United Kingdom financial sector. UK financial institutions entering into a financial transaction with euro area financial institutions would still be liable for the FTT, which could be collected through EU mutual assistance for the recovery of tax or as a result of the regular provisions of joint and several liability. We urged the Government to work to ensure that UK financial institutions are not so damaged and that the United Kingdom tax authorities’ workload is not increased by an FTT introduced by an advance pioneer group of member states.

The Government’s response to the committee’s report has been received, for which we are grateful. However, we found the response to that point complacent. It merely states that the Government,

“will continue to contribute to discussions on the proposal with these issues in mind, and will continue to highlight that unless applied globally, FTTs risk relocation of business activity to countries not applying the tax”.

The deleterious impact of a euro area FTT on the UK could be very serious. I should be grateful if the noble Lord, Lord De Mauley, could provide us with a more considered response to those concerns. How are the Government seeking to address them? Who are the Government currently talking to and canvassing? Which MEPs and fellow Council members inside and outside the euro area are the Government talking to?

We were dissatisfied with the Government’s position on an FTT in one other respect. In his evidence to us, the Financial Secretary to the Treasury argued that the Government do not support an EU FTT but do not object in principle to a global FTT. The Government’s support for a global tax has been lukewarm at best. If the Government support the introduction of a global tax, they should make a sound case for it. If, however, their true position is that they oppose a financial transaction tax in principle and in practice, they should say so in thunder. The Government’s response argues that their position is clear, but we found it as clear as mud and acting to the gallery of those who seriously believe in the benefits of a Robin Hood tax.

Beyond all that, it is imperative that Her Majesty’s Government remain fully engaged in the debate. Discussion on whether and how the financial sector should be taxed cannot be ignored. In our report, the committee considers other models, including a financial activities tax or an EU-wide tax on the model of UK stamp duty, which appeared to be gaining traction when the report was published. We found that such models may bear further exploration. Since the report was published, the debate has moved on further still. The Compact for Growth and Jobs annexed to the conclusions of the European Council meeting on 28-29 June states at paragraph 3(j) that the,

“proposal for a Financial Transaction Tax will not be adopted by the Council within a reasonable period. Several Member States therefore will launch a request for an enhanced cooperation in this area, with a view to its adoption by December 2012”.

What update can the noble Lord, Lord De Mauley, give us on the current state of negotiations on the adoption of an FTT?

The leaders of Germany, France, Italy and Spain are reported as remaining in favour of an FTT. Which member states are expressing an interest in pursuing its adoption under enhanced co-operation? Given the implications for the United Kingdom, to which I have referred, what role are the Government playing in seeking to influence these discussions? I look forward to hearing the contributions on this important proposal, not only from the noble Lord, Lord De Mauley, but also from noble Lords on all sides of the Committee. I beg to move.

--- Later in debate ---

[Lord Harrison]

My Lords, I am most grateful to the Minister for answering all colleagues who joined the debate this evening. I am particularly grateful to two of my colleagues from Sub-Committee A, the noble Lords, Lord Dear and Lord Flight, for speaking in the gap. It is one of the joys of the House of Lords that no sooner is one professor of economics unavailable then another springs to his place and offers an adumbration of the points I was making about John Maynard Keynes and James Tobin. Therein lies the reason why this interesting examination of the FTT proposed by the Commission fell at the first hurdle, because in each case—that of Keynes and Tobin—a single objective was being attempted, not the suite of five ideas we were offered by the Commission.

Let me bring joy to the heart of my noble friend Lord Giddens and tell him that in our most recent report, published on Monday, Markets in Financial Instruments Directive II, on which I am sure that the Minister is looking forward to answering later, we analyse the question of high-frequency trading and algorithmic trading and make a distinction between the two. I am pleased that the Minister gave us some prior information about the Foresight group, from which we will hear later. The noble Lord, Lord Kerr, made the point that the committee rejected the proposition for FTT. Others may come to the fore which we will examine.

Finally, if noble Lords are interested in this area, they should read the Commission’s impact assessment, which was dreadful in the way that it castigated and condemned the proposals before us. In the mean time, I am particularly grateful to all those who have contributed to a debate to which we will need to return.

Motion agreed.