Europe: Time for plan B

Author: | Published: 23 Sep 2013
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It's no secret that the financial transaction tax (FTT) has not been the resounding success the European Commission (EC) had hoped for.

Although the EC's flagship proposal is scheduled to be implemented across 11 EU member states, its effects are far more damaging than that.

In the case of the FTT, it seems, the right to opt-out is completely illusory and the €35 billion ($55.5 billion) levy could catch transactions and products in non-participating countries.

Indeed, in an uncharacteristically blunt – although not legally binding – 14-page opinion, the EC's top legal advisor recently concluded that the tax exceeds national jurisdiction and is incompatible with EU treaties.

According to the brief, the FTT – also known as the Robin Hood tax or Tobin tax – is discriminatory and likely to lead to distortion of competition to the detriment of non-participating member states. Many now believe that, instead of trying to reengineer the much-maligned joint tax to address the latest concerns about its legality, Europe's policymakers would be well advised to abandon the shambolic initiative altogether and focus its energy on looking at different ways to tax the financial system.

The FTT is certainly not the only solution. There are a variety of ways to raise money from the financial sector to make it pay for any past or future bailouts. It wouldn't take a huge amount of imagination to come up with alternative plans.

Some believe that one of the most workable options would be to re-evaluate the feasibility of a financial activities tax (FAT). The FAT is a tax on supernormal wages and profits equivalent to a value added tax (VAT) for the financial sector.

As well as responding to under-taxation of the financial sector, introducing a tax on banking sector profits, salaries and bonuses would discourage the risk-taking behaviour that was thought to be the root cause of the last financial crisis.

Although introducing a FAT would make the tax system more complicated, and its scope might be difficult to define, it represents a far superior solution to doggedly continuing along the doomed FTT trajectory.