PERSPECTIVE Financial Transaction Tax Sensible, Feasible, Overdue CARSTEN SIELING May 2012 What began in 2008 as a global financial crisis and de­veloped into an economic crisis has now reached its apogee – at least in Europe – in the destabilisation of public finances. Its causes are to be sought in regulatory and supervisory liberalisation across the globe, spawned by a radical free market ideology concerned solely with the maximisation of profit, investment returns and bonuses, totally eclipsing the financial markets’ original function in the service of the public interest. The basis for this is formed by an enormous quantity of money which, furthermore, is the result of redistribution in favour of enterprise profits and at the expense of labour income. Between 1990 and 2010 the volume of global financial market transactions has swelled from seven times global GDP to twenty-six times and with an upward trend. At the same time, the magnitude and integration of actors has increased. As a consequence of the crisis public debt in the EU member states has risen from 60 per cent of GDP in 2007 to 80 per cent in the subsequent years. The fi­nancial sector has received enormous financial assistance from governments. For example, EU member states spent 4.6 trillion euros to rescue the financial sector. Further­more, the financial sector has benefited from low taxes in recent years. The VAT exemption enjoyed by financial services represents a tax benefit worth around 18 billion euros a year. But the financial sector’s regulatory privi­leges are increasingly stifling growth of the real economy. Europe stands at a crossroads: will it introduce policies to halt speculation against the crisis-countries and once more offer European states the prospect of real growth? One instrument repeatedly discussed in this context is the financial transaction tax. Similar to Germany’s value added tax, 1 it is a tax on all financial transactions. This means all exchange and over-the-counter transactions, in other words, every purchase or sale of shares, foreign currency, derivatives, securities, bonds and other financial products are taxed. It thus kills two birds with one stone: On one hand, it makes speculation more expensive. With high frequency trading, high-performance computers employing algorithms trade into and out of investment positions thousands or tens of thousands of times a day. It is the sheer volume of transactions that generates profits. However, if each individual trade is taxed traders’ profits are appreciably lowered, making such transactions less attractive. On the other hand, it has a substantial fiscal effect. A financial transaction tax would help to recoup part of the costs where speculation does the most damage. Studies show that for Germany alone such a tax could bring in up to 20 billion euros a year. 2 The debate on the taxation of financial transactions is not new. James Tobin proposed a tax on currency trans­actions decades ago. Some states have long had similar taxes. For example, since 1694 Great Britain has levied a tax on securities transactions. Stamp duty to this day provides billions of pounds’ worth of stable revenue. In Germany, too, up to 1991 a stock exchange tax was lev­ied. Under the Red-Green coalition, efforts were made to introduce a financial transaction tax, but the deregu­latory fervour of the time was against it. The notion was revived in Germany because of the financial crisis. After 1. In more precise terms, the financial transaction tax corresponds to the land transfer tax which applies to every trade and not – as a consequence of the pre-tax deduction in the case of VAT – only to value added. 2. Schulmeister, Stephan(2009): Die Finanztransaktionssteuer – Konzept, Begründung, Effekte. In: Informationsbrief Weltwirtschaft& Entwicklung.