PART III Developing an own resources mechanism for the 21st century – Building blocks for
7 Options for new own resources
7.8 Assessing and ranking new own resources
would either lose or gain depending on whether the tax is production- or consumption-based.
Large losses would be incurred in all cases by Poland, the UK and the Czech Republic, as well as most other new Member States from Central and Eastern Europe. Such a redistribution of the national financial burden would unlikely be acceptable as such, and would lead to requests for compensation (see section 7.10).
Please note that the FTT is not evaluated, as the legal implications are complex and hence it requires a separate assessment, which is described below.
Table 7-2. Resources ranking and assessment scoreboard
Criterion Score out
of 100 Weight Weighted score,
sub-area
Weighted score,
total Economic considerations
Economic efficiency/distortion effects 0 100 0 0
Vertical equity in promoting
redistribution 0 50 0 0
Horizontal equity among equivalent
citizens 0 50 0 0
Fairness among Member States 0 200 0 0
Any additional criterion? 0 0 0 0
Sub-total 400 0 0
Political and administrative factors
Sufficiency of revenue 0 50 0 0
Stability as revenue source 0 100 0 0
Other administrative considerations 0 50 0 0
Link to EU policy concerns 0 200 0 0
Visibility and transparency to
taxpayers 0 200 0 0
Any additional criterion? 0 0 0 0
Sub-total 600 0 0
Political economy adjustment factor 1
Total 1,000 0
Source: Authors
Table 7-3 illustrates this process and its outcomes for own resources, the GNI resource and three out of the four candidates considered (VAT, CIT and the carbon levy) with arbitrary weighting schemes. It should be clear that a different set of weights would yield a different ranking. Given the exceptional nature of the FTT, we present a more detailed assessment in the next subsection and do not perform this ranking.
Table 7-3. Resources ranking and assessment scoreboard for the TOR, GNI, VAT, CIT and carbon levy (for illustration)
Summary of scores
Economic Political/admin. Total
TOR 62 46 54
GNI 70 61 66
VAT 59 74 67
CIT 56 58 57
Carbon levy 68 70 69
Source: Authors’ own calculations
Of course, the multiplicity of criteria and the arbitrary weights retained in this assessment end up with all existing and potential instruments being a very close call.
7.8.1 Assessment of the proposed FTT in relation to budgetary criteria
With regard to budget sufficiency, the amount that the FTT could in theory generate is substantial and could become a major component of the contribution to EU budget resources.
The Commission has estimated annual revenues to be around €30–35 billion, or 0.4–0.5% of the GDP of the participating Member States.52 Yet this estimation is by nature uncertain,53 and has moreover become questionable, especially in light of the current context:
Forecasts are impacted by future economic uncertainty.
The taxable activities have not been agreed upon.
Financial market reactions are difficult to anticipate (not least towards their risk-averse behaviour as well as their capacity to circumvent the FTT through fiscal engineering or tax evasion through activity relocation).
The positive impact of the FTT on the single market functioning, harmonisation and global EU-28 GDP growth rates is limited by the fact that its implementation is foreseen only at the EU-10 level.54
The FTT tax base and rates to be implemented at the national level of participating Member States are still to be determined.
The discouraging effect that the FTT could have on the investment of foreign companies in participating Member States is difficult to estimate.55
Consequently, the impact of the FTT on own resources stability is equally uncertain (considering also the instability of stock markets), which is likely to introduce complexity in the set-up of a mechanism for GNI-based contribution deductions applicable to the budget. The issue of how the remaining budget is financed would be complex, as presented in subsection 7.10.3.
The conception of the FTT as a genuine own resource should in principle impact positively on financial autonomy at the EU budget level. There are, however, considerations of vertical fairness among Member States, notably because the weight of the financial sector differs in each economy. It would lead to the banking sector of Germany and some other participating Member
52 See “Taxation of the Financial Sector”
(http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index_en.htm).
53 French Minister Bernard Cazeneuve estimated in 2012 that FTT could raise between €10 and 13 billion annually – see “Financial transaction tax should bring in EUR 10 bn: France”, EUbusiness, 23 October 2012 (http://www.eubusiness.com/news-eu/finance-france.k7c).
54 The European Commission estimates a negative impact on growth. The EESC (p. 3, 1.11) tempers this with the view that it could be positive +0.25%, referring notably to two studies: Schulmeister (2011) and Griffith-Jones and Persaud (2012).
55 The EESC, however, “believes that slowing down the pace of highly speculative transactions by introducing the FTT would have a significant stabilising effect on price fluctuations on the financial markets and would offer companies operating in the real economy more stable financial scenarios for their own investments”. See the Opinion of the European Economic and Social Committee on the Proposal for a Council Directive on a common system of financial transaction tax and amending Directive 2008/7/EC COM(2011) 594 final, 29 March 2012, p. 2, 1.7.1.
States contributing relatively more than others to the total FTT-based resource. This may revive debates on juste retour and lead to claims for correction mechanisms.
Concerning the transparency of the tax and its visibility to EU citizens, it is likely that awareness of contributing to the tax would be limited to financial institutions and investors falling within the scope of the tax, as most of EU citizens are not concerned by the tax.
The coherence between the objectives of the FTT proposal and EU policies is established at three major levels: avoiding fragmentation in the single market for financial services, ensuring fair contribution of the financial sector to covering the costs of the recent crisis while better aligning the financial sector’s taxation level with other economic sectors, and creating disincentives for excessively risky (speculative) behaviours. The previous sections address the capacity of the FTT to meet these criteria. It is clear, ultimately, that the performance relative to these criteria would or could be hampered by at least two factors:
the FTT’s implementation is foreseen in (now) ten Member States and not at an EU-28 level; and
the risk of seeing financial institutions passing on the tax burden to the final consumer.
Although from this perspective, the tax impacts would fall on final consumers mostly represented by financial institutions themselves, and by consumers adopting excessively risky behaviours.
The economic efficiency of the tax depends on a large number of factors that are difficult to assess beforehand: How powerful would it be in discouraging excessively speculative behaviour and fostering risk adversity? How far would financial actors go in their attempts to circumvent the tax through the relocation of their activities? What would be the real level of double taxation and the cascading effects? To what extent could foreign institutions be discouraged from investing in participating Member States? What would be the real impact of the tax on Member States’ GDP? Countries that have implemented the FTT show widely varied success in this respect (Sweden vs South Africa, India, Brazil, South Korea…).
From an administrative perspective, it is probable that the operating costs for FTT collection would be rather limited, as most transactions are carried out electronically and likewise the tax could be collected electronically and at the source. The Commission has estimated collection costs to be less than 1% of the revenue raised, especially when good use could be made of the existing market infrastructure, e.g. with the help of trading platforms, trade repositories and clearing houses.56 Still, specific measures and collaborative mechanisms between Member States to address situations of tax evasion, information exchange or assistance for tax recovery could affect operating costs.
With respect to vertical fairness among Member States, in theory there is a positive correlation between investments in shares, the development of capital markets and GDP. Yet, a high degree of capital mobility across borders induces a regional arbitrariness that makes it difficult to assess the contribution of participating Member States to the tax (Cattoir, 2004). That is not necessarily a negative factor; it would actually be aligned with the criterion of regional
56 See European Commission, Technical Fiche, Tax Collection (n.d.) (http://ec.europa.eu/danmark/documents/alle_emner/toldunion/120424-tax_collection_en.pdf).
arbitrariness, encouraging the treatment of the FTT as a ‘real’ own resource, as is the case of the customs tariff.
A concern is that variable geometry generates another difficulty: How to determine the contributions of the non-participating Member States? It would be possible to separate the contributions of the participating Member States from those of non-participants, ensuring that the non-participants contribute, as their proportion of GNI, a share that is equivalent to the percentage of GNI contributed by the participating Member States as a group (see subsection 7.10.3).
The fact that the FTT would be implemented under enhanced cooperation in a limited number of Member States hinders fulfilment of the criterion of horizontal fairness among Member States, because of the differentiated treatment of the financial sector and institutions according to their establishment in or out of the FTT zone. But this principle is likely to be mitigated through the principle of taxation based on residence. Conversely, horizontal fairness would increase within the FTT zone through the effect of the harmonisation.
Concerning the criterion of vertical equity among the Union’s taxpayers and citizens (i.e.
taxpayers’ increasing tax burden based on their contribution capacity), several factors need to be accounted for, from the original conceptual objectives of European Commission’s proposal down to the concrete effects at the implementation level. As for other indirect taxes, the performance of the FTT with regard to vertical equity is not to be achieved through progressive tax rates, but it seems logical that the richer the economic actors are, the more likely they are to fall under the scope of application of the FTT. Nevertheless, more complex and unpredictable issues should also be considered, requiring a sound analysis that exceeds the scope of this report, especially with regard (but not limited) to the following questions:
To what extent could (and would) financial institutions find ways to pass the tax burden on to final consumers in order to maintain their margins, and through which mechanisms?
How could it be verified and guaranteed that such cost repercussions on final consumers do not affect operations that are obviously exempt from (excessively) speculative behaviour and excluded from the scope of the FTT?
Ultimately, what would be the impact on achieving the objective of the European Commission’s proposal to“to ensure that the financial sector fairly and substantially contributes to the costs of the crisis and that itistaxedinafairwayvis-à-vis other sectors for the future view” (European Commission (2013a)?
The restrictive geographical nature of enhanced cooperation introduces biases in relation to the criterion of horizontal equity among EU citizens, whereby individuals in similar circumstances should be treated equally. More specifically, equal treatment would be reinforced among residents within participating Member States, but discrimination could arise between residents of participating and non-participating Member States (either by introducing cases for double taxation or by fully excluding financial transactions from the scope of the FTT).