By Mojmír Hampl (GFS News 11.7.2011)
Czech National Bank vice-governor Mojmír Hampl says a tax on financial institutions will only damage the fragile economic recovery and harks back to the disastrous impact that a tax on share trading had on Sweden when it was introduced in the 80s.
A number of neglected but very hot and important European topics are being overshadowed by the Greek crisis.
One of them is the issue of the "new own resources of the EU". Many influential officials and politicians, especially in the European Parliament and the European Commission, think that more "federal" taxes should be levied in the Union as a non-existent federation.
These taxes would flow directly from individual taxpayers to Brussels rather than through the member states.
It is of course a purely political question whether the EU members will allow their taxpayers to finance the European superstate in addition to their often Byzantine nation states.
However, given how far the debate has progressed and how strong the pressure for new EU resources is, it might be a good idea to discuss this issue more in public.
There have been several alternatives as regards whom the additional European tax would be imposed on and how.
Besides taxation of air tickets and carbon dioxide emissions, a financial transaction tax and a financial activities tax have been mooted.
And therein lies the rub. It seems that in the persisting atmosphere of financial crisis, it could be easy for the "new own resources" advocates to win support for this tax, as it can be easily sold as a punishment for "repulsive and greedy bankers".
By definition, introducing new taxes should be difficult, as taxes once levied are rarely abolished. So here are a few arguments why such a new tax is not a good idea.
First, any such tax would inevitably be passed on - to a greater or lesser extent - to the customers of financial institutions. This is particularly true of the FTT, which, when levied extensively, is in fact a sort of value added tax on all financial transactions.
But even if it was only levied on bond, currency or share trades and not on every account-to-account transfer, it would affect a significant proportion of the population and firms.
After all, each mutual fund investor or client of an insurance company, bank or pension fund indirectly buys and sells bonds or shares. As for the less-often-mentioned FAT, which is a tax on profits and remuneration in the financial sector, financial institutions would also incorporate such a tax into their costs and collect it from their clients in a different form.
Second, most economists agreed after the crisis that banks generally require more capital and liquidity as a buffer for any future financial turmoil.
The introduction of these new rules (called Basel III) into European law is imminent. What sense does it make, then, to require banks to have more money, capital and liquidity and at the same time to withdraw the same funds from the sector through various forms of taxation?
The old adage says that you can't have your cake and eat it. But in a way that is exactly what we are trying to do in the EU, because in addition to considering new taxes on the financial sector, many EU countries have already introduced a bank levy, ie. a tax calculated, to put it simply, on the basis of each bank's size.
Third, some countries - for example the United Kingdom, Sweden and the Czech Republic - have so far opposed the FTT tax in the European debate.
With their large financial sector, the British rightly fear that the introduction of the FTT, for example, would put their sector, or the entire EU, at a disadvantage with respect to the rest of the world, as in an era of free capital movement and easy transfers of transactions from one country to another, even a small additional cost per transaction could wipe out a large part of the sector. Shares, bonds and currencies would be traded outside Europe.
The Swedes have perfect understanding of this argument in the EU, as this is exactly the experience they had themselves. They introduced a unilateral tax on share trading in 1984 and a tax on bond trading five years later. The revenues from these taxes were some one-twentieth of what was expected.
Why? Because most transactions immediately moved to London and other capitals. This happened despite the fact that the tax rate on a single bond transaction was only between 0.002 per cent and 0.03 per cent. Sweden abandoned the FTT experiment in 1991. It is sensible to learn from experience and not go down a dead end street again.
The Czech Republic was sceptical about additional bank taxation during the financial crisis - not only as a matter of principle, but also because the crisis did not affect its financial sector.
In March, however, the political demands for further elaboration of the FTT concept were incorporated into the so-called Euro Plus Pact and gained political cover from numerous EU countries. Remember?
The Pact was supposed to boost competitiveness of the involved countries. Let us leave aside the fact that there are hardly any examples in economic history where the introduction of a new tax increased competitiveness.
What is important is that in June a majority of European deputies supported the idea of the FTT as additional source of EU budget revenue, enabling the EU budget to be expanded by 5 per cent as from 2014.
And the European Commission has also recently backed the idea of the FTT as a promising and preferred new own resource of the EU.
This makes it even more important to discuss the downside of further financial sector taxation and not to be appeased by the fact that just a "small-scale" or "low-rate" FTT (generating revenues of some €30bn at EU level) is currently under discussion.
I will bet my salary that if such a tax is introduced, then it will not be abolished in the foreseeable future and its rate will rather only increase over time.