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The German DIW just published a new study on the European Financial Transaction Tax. Its revenues are higher than expected, even with a 75 % reduction of turnover! What follows is the executive summary in English of the analysis:


The present study examines the effects of the introduction of a financial transaction tax along with enhanced cooperation across 11 European Union member states. In particular, based on the tax concept of the European Commission, the tax revenues for four participating countries, Germany, France, Italy, and Austria, are estimated.




· The cross-border financial transaction tax (FTT) is of fundamental importance to the European Union. With the FTS, it is hoped to establish a model of enhanced cooperation across the fiscal area, to generate substantial fiscal revenues, to adequately share the cost of the crisis with the financial sector, and to contribute to the prevention of future crises.

· France and Italy introduced in 2012 and 2013, respectively, their own models of the FTT. The overall review of the available empirical evidence on the impact of those FTT-models does not allow a clear conclusion. The studies find mostly a decline in trading volume, but the findings are strongly dependent on the selected control group for the taxed firms, and the duration of the observation period. A study of the tax elasticity suggests that the limited tax bases invite traders to avoid taxes by switching from taxed to non-taxed financial instruments.

· The estimation of the tax revenues for four EU countries is at the core of this study. The results of the first estimation reveal that a FTT with a broad tax base can provide substantial revenues. The obtained revenue for Germany ranges from 18 to over 40 billion EUR, if the tax is collected on the basis of both residence principle and issuance principle, and the tax rate is 0.1 percent for securities and 0.01 percent for derivatives. France's tax revenue varies from about 14 to about 36 billion EUR. The estimated volume for Italy is between 3 and 6 billion EUR. Austria could expect revenues between 700 million and about 1.5 billion EUR.

· If the tax base is broad, considerable revenues can still be achieved even if the rates are lowered. In case of a uniform tax rate of 0.01 percent for both derivatives and securities, the estimated revenue for Germany is between nine and about 34 billion EUR.

· If the secondary markets for government bonds are not taxed, the forecast for the revenue is considerably lower. Germany's volume is then between 11 and about 36 billion EUR. France can expect revenue ranging from about 10 to 30 billion EUR. Italy's revenues are between 2 and about 5 billion EUR. Austria can expect revenues between a half and slightly over one billion EUR.


· Likewise, a waiver of the residence principle would strongly restrict the fiscal yield of a financial transaction tax. Italy and Austria would be particularly affected. While France and Germany would lose about thirty percent of the estimated income, Austria would lose more than three-quarters of its forecasted revenue. Therefore, smaller countries may be disproportionately affected if the residence principle was dropped and the FTT was collected on the basis of the issuance principle only.

· Derivatives make up most of the tax base. If exempted, most of the potential revenue from FTT is lost. Germany and France could lose about 90 percent of the revenues.

· In addition, exemption of derivatives encourages traders to circumvent the tax through instrument arbitrage. The likely consequence is a strong erosion of the tax base in the taxable segment. Therefore, a model that stages the introduction of the FTT and leaves the derivatives exempt in the first stage seems to be unsuitable for achieving the objectives of the FTT.

· Data on how certain types of traders (banks, hedge funds, insurance companies, etc.) are affected by the FTT are scarce. In the segment of over-the-counter derivatives “reporting banks” of the Bank for International Settlements and “other financial institutions" appear to be affected in particular. In contrast “non-financial institutions” seem to be rarely affected. Even such rather rough assessment is not possible for exchanges. The required data on counterparties are not available.

· Measures to improve the financial transaction data are urgently needed. The breakdown of publicly available turnover data by stock exchange, financial instrument’s country of issuance, and residency of the counterparties would be particularly helpful in calculating the consequences of the FTT.



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