Rapport PwC sur la taxe sur les transactions financières (2013)

www.pwc.co.uk

Financial transaction
tax: The impacts and
arguments
A literature review
21st November 2013

Financial transaction tax: The impacts and arguments

Contents
1. Executive summary

1

2. Key findings

4

Annexes

12

Annex 1 – Key arguments for and against the European Commission’s proposal

13

Annex 2 – Outline of the European Commission’s proposal

17

Annex 3 – The impact of the FTT on EU-11 financial markets

21

Annex 4 – The wider impact of the FTT

26

Annex 5 – Lessons from national FTTs

32

Annex 6 – Bibliography

42

Annex 7 – List of commissioning organisations

49

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1. Executive summary
1.1

Background

This report has been authored by PricewaterhouseCoopers LLP (PwC) and was jointly commissioned by a group
of European business associations that represent corporate and institutional consumers of financial services as
well as the providers of such services and exchanges. A list of the commissioning organisations can be found in
Annex 7.
The purpose of this report is to independently review and distil the main points from the large body of literature
that has been generated to date on the European Commission’s (EC) initial proposal for a harmonised Financial
Transaction Tax (FTT) in the European Union (EU) and the subsequent authorised proposal for a FTT put
forward by eleven countries within the European Union (EU-11);1 and, bearing in mind that many reports focus
only on a particular asset class, to use that review to provide an indication of the expected impact of the FTT
across the financial services sector and its constituent product groups.
In furtherance of the objectives set out above, this report considers – drawing from the large body of published
literature – the nature of the EC’s proposal, the impact of the FTT on financial markets both within and outside
the EU-11, the key arguments for and against the EC’s proposal and the experiences of implementation of
several historical and contemporary national FTTs.
This report has been specifically structured to facilitate access to the information contained in it. The first
section will synthesise the key findings of the literature review in order to serve as a briefing note for
policymakers and senior officials, with subsequent sections serving as technical annexes covering the full
findings of the literature review as they relate to specific areas of interest.

1.2 What is a financial transaction tax?
Despite the recent attention given to the concept of a tax on financial transactions, it is far from a new idea.
Indeed, several countries, such as the United Kingdom, have levied stamp duties on certain financial
transactions for several centuries. However, the concept of a FTT was only fully articulated in 1936 by the
renowned economist John Maynard Keynes. Keynes’ rationale for a FTT centred on its potential to bring
stability to markets and raise additional revenue for government.
More recently, Nobel Laureate economist James Tobin’s proposal for a specific currency transaction tax (CTT)
in the 1970s as a way of managing exchange-rate volatility has been conflated with Keynes’ FTT, and the term
‘Tobin Tax’ is used interchangeably to describe either tax.
Although the debate surrounding FTTs is clearly not a new one, substantial impetus has been added to it by the
wake of the financial crisis. Financial market stability has become a key priority for governments and
regulators, resulting in a resurgence of proposals for the implementation of FTTs or similar taxes due to their
suggested volatility-reducing properties and ability to dissuade investors from entering into unproductive
trades. Most prominent among these recent proposals has been the EC’s plan to implement a FTT in the EU-11.

The EC’s initial proposal and the subsequent authorisation of the proposal from the EU-11 pre-dates Croatia’s
accession to the EU on 1st July 2013 as the 28th Member State. Consequently, any references to EU Member
states and the economic impacts of the EC’s FTT on Member States contained in this report are based on a
definition of the EU that pre-dates Croatia’s accession.
1

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1.3 The European Commission’s proposal
On 28th September 2011 the EC tabled an initial proposal for the implementation of a harmonised FTT in the
EU that would cover a wide range of financial transactions. The objectives of this initial proposal (EC, 2011a)
were to:
1.

“harmonise legislation concerning indirect taxation on financial transactions”

2. “ensure that financial institutions make a fair and substantial contribution to covering the costs of the
recent crisis and create a level playing field with other sectors from a taxation point of view”
3. “create appropriate disincentives for transactions that do not enhance the efficiency of financial markets”
EU-27 Finance Ministers failed to reach unanimous agreement and this initial proposal was ultimately
unsuccessful. However, 11 Member States, known as the EU-11, expressed willingness to implement the EC’s
proposal and were granted permission to do so on 22nd January 2013 under the EU’s enhanced cooperation
procedure (EC, 2013a). The Eu-11 is made up of Belgium, Germany, Estonia, Greece, Spain, France, Italy,
Austria, Portugal, Slovenia and Slovakia.
As the EU-11’s proposal currently stands, a minimum tax rate of 0.1% will be levied on non-derivative
transactions, including sovereign debt securities, and a minimum rate of 0.01% on the notional value of
derivative transactions applicable to most trading in equity, sovereign debt, corporate debt, repurchase
agreements (repo) and derivatives (EC, 2013a). It is proposed that the tax will function on the residence
principle and elements of the issuance principle. Additionally, a tax liability will be generated on every ‘material
modification’ in a transaction settlement chain (EC, 2013a), creating a ‘cascade effect’.
The potential for the proposal to generate extra-territorial impacts has been the subject of legal debate, with
Englisch et al. (2013) highlighting that this is potentially in conflict with both customary international law and
existing EU Treaties governing the use of the enhanced cooperation procedure. At the time of writing, the EU11’s proposal is subject to a legal challenge from the UK (Case C-209/13 UK v Council) and the legal basis of the
FTT has been recently challenged by the European Council’s Legal Service which is in contrast to the EC Legal
Service’s opinion supporting the proposal’s legal basis (Barker, 2013).
A more detailed examination of the EC’s proposal and a discussion of the cascade effect can be found in
Annex 2.

1.4 Key findings
The key findings of this report are as follows:


Highly polarised debate: Financial transaction taxes have long been a subject of debate in academic and
business communities. However, the debate around the current EC proposal remains highly polarised,
building into the wider contemporary debate on financial services (FS) sector taxation and the use of tax as
a means of regulation. The EC’s proposal has found mixed reception among politicians, academics, the
business community and civil society. The debate in the literature has so far concentrated on the taxation of
the FS sector, the sector’s role in the financial crisis and the anticipated impacts of the FTT, although more
recently the legal basis of the EC’s proposal has been questioned, with the UK’s legal challenge and the
European Council Legal Service’s criticism serving as prominent examples. The arguments for and against 9
key areas of the debate on the EC’s proposal are set out in Annex 1.



Anticipated impact on the EU economy: Despite its intention to raise revenue and reduce risk in
financial markets, it is not clear from the available evidence as to whether these objectives will be achieved.
The proposed FTT is predicted, by both supporters and opponents, to impact adversely on GDP (discussed
in Annex 4), although the impact could be lessened if revenues are used for growth-enhancing initiatives as
the EC has suggested. A number of financial markets located in the EU-11 are likely to be negatively
affected, although the impacts are highly market-specific and are far from certain (discussed in Annex 3). It
should also be noted that some of the adverse impacts on financial markets are conceptually intentional as
the EC wishes to use the FTT as a means to curb socially undesirable transactions by making them
economically unfeasible. Furthermore, the empirical support for the ability of FTTs to bring stability to
financial markets is debatable, with some studies finding evidence to suggest volatility reduction in equity

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markets as a result of the imposition of a FTT, some finding an increase in volatility and others finding no
such relationship (discussed in Annex 4).


Anticipated wider impacts: The EC’s proposal is also anticipated to generate impacts that reach beyond
both the conceptual and geographical scope of the FTT. As the EC’s proposal currently stands, ring-fencing
measures to insulate non-financial business and households from the incidence of the tax are in place.
However, it has been suggested that despite these measures, households and non-financial businesses will
be negatively affected by its imposition. Some have suggested that this could translate into adverse effects
on pensions and impairment of the risk management capability of businesses (discussed in Annex 3). In its
current form, it has also been suggested that the proposal may generate adverse extra-territorial effects for
non-participating jurisdictions, such as by influencing the cost of funding for sovereign and corporate
issuers of debt or by influencing the location of financial activity. However, the use of the issuance principle
in the EC’s proposal and the need for the servers of high-frequency traders to be located close to the servers
of exchanges could discourage relocation of financial activity (discussed in Annex 4). The potential to
generate extra-territorial effects has prompted the current legal challenge from the UK government and the
European Council Legal Service’s criticism of the legal basis of the proposal. More detail on the anticipated
wider impacts of the EC’s proposal can be found in Annex 4.



Mixed experiences of national FTTs: There are numerous examples of unilaterally implemented FTTs.
Some, such as Sweden’s FTT, generated significant adverse impacts and were eventually abolished, whereas
others, such as the UK’s stamp duty have been less problematic. It has been suggested that the existence of
numerous historical and contemporary FTTs, particularly those that were implemented successfully,
provide the EC with a large body of international precedents to draw on when implementing their FTT. A
review of this body of experience illustrates that FTTs have the potential to generate economic impacts that
deviate from those predicted in impact assessments, with their impacts demonstrating high levels of
heterogeneity. As has been suggested, the mixed successes and limited geographical scope of national FTTs
may prove to be ultimately less instructive for the EC, suggesting the need for caution when generalising
with regard to their current proposal. An in depth discussion of the nature and experiences of
implementation of several national FTTs can be found in Annex 5.

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2Key findings
2.1 Introduction
In this section of the report we present a high-level overview of the key findings of the literature review as they
relate to the arguments for and against the EC’s proposal, the anticipated impact on EU-11 financial markets,
the anticipated wider impacts and the experiences of the implementation of contemporary and historical
examples of national FTTs.
This section has been structured in the following way. Section 2.2 outlines the literature review process. Section
2.3 presents the key arguments for and against the EC’s proposal. Section 2.4 outlines the background and key
attributes of the EC’s proposal. Section 2.5 presents a summary of the key findings of the literature review.
Section 2.6 draws on the previous sections to provide a high-level synthesis of a broad range of issues raised in
the literature. The areas of discussion in this section are supported by detailed technical annexes that can be
found later in the body of this report.

2.2 The literature
A wide range of literature relating to the EC’s proposal and FTT’s more generally has been reviewed during the
drafting of this report. A careful selection process, emphasising credibility and reliability, has resulted in the
inclusion of 147 different pieces of literature drawn from a variety of sources in this report. A full bibliography
of the literature reviewed in this report can be found in Annex 6 and the proportion of literature used by type of
source is shown in Figure 1. As is evident, this report has drawn heavily from reports published by international
finance institutions, research institutions and journal articles together with government reports and private
sector research to provide a balanced approach to the literature.

Figure 1: Breakdown of utilised literature by type of source
8%

6%

International
Financial Insitutions
Research Institutions

12%

9%

Journal Articles

22%
29%

Government
Documents/Reports
Private Sector
Research
Media Articles
Other

14%
Due to the breadth of literature generated to date on the subjects of the EC’s proposal and the theoretical
concept of FTTs, authors have tended to focus their attentions on very specific areas, such as issues relating to
particular markets or implementation issues rather than the FTT as a whole. This has meant that a full metaanalysis was not possible in the interests of maximising the amount of content included in this report.
In the process of reviewing the literature, structural trends have emerged which have given way to a distinct
grouping around conceptual discussions of FTTs and the commentaries on the specificities of FTT design, with
very few sources combining elements of the two groups. This has in part contributed to the polarisation of the
debate, but has more directly led to a complex body of literature that does not readily lend itself to uniform
application to the EC’s proposal.

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2.3 Key arguments for and against the EC’s proposal
The EC’s proposal has been subject to an intense debate which is reflected in the literature, with many
arguments and counterarguments for and against the FTT being put forward.
The key arguments put forward in support of the EC’s proposal are:


Aids recovery from financial crises: That the introduction of a FTT in the EU-11 may help Member
States to recover the costs of the recent financial crisis and potential future financial crises by aiding fiscal
consolidation (EC, 2011b).



Compensates for VAT exempt status: That the introduction of the proposed FTT would compensate
for the current VAT exemption of financial services in the EU-11, which the EC claims creates a tax
advantage of €18bn per year for the financial sector (EC, 2011c).



Reduces the profitability of criticised investment behaviour: That the EC’s proposal would
discourage certain types of order flow that have been the subject of criticism, such as high frequency trading
(HFT), by reducing the profitability of such activity (EC, 2011b; Buckley, 2012).



Existing international precedents: That there are many taxes on financial transactions currently
implemented in different jurisdictions and so it should not be regarded as unacceptable for EC to introduce
one (EC, 2013b; Persaud, 2013), although nearly all of the existing FTTs are significantly narrower in scope
than the Commission’s proposal and, in most cases, centre on some form of stamp duty on equity and
equity-related transactions.

The key counterarguments put forward against the EC’s proposal include:


Likely negative impact on GDP: Impact assessments of both the EC’s original proposal and the EU-11’s
current proposal suggest that the implementation of the EC’s proposal is likely to have a negative impact on
GDP growth. Estimates range from 0.28% (EC, 2013b) for the current proposal to 2.42% (Oxera, 2011) for
the EC’s original proposal. The EC and Oxera both estimate that the loss of GDP will be greater than the
expected tax revenue from the FTT, which is an estimated 0.25% of EU-27 GDP (EC, 2013b; Oxera, 2012).



The FS sector currently has a high tax burden: That the European FS sector, in spite of a VAT
exemption estimated to have conferred a potential tax advantage of between €18.1bn and €23.6bn in 2009
(EC, 2011b), currently bears a higher than average tax burden which has made it a significant contributor to
government revenues (PwC, 2013). Research has suggested that the VAT exemption in fact burdens the
European FS sector with irrecoverable VAT, estimated to be €33bn in 2007 (PwC, 2011), which creates a
significant economic distortion (Gottfried and Wiegard, 1991; de la Feria and Lockwood, 2010; Adam,
2011). The EC has accepted that, “the extent to which the [VAT] exemption constitutes a tax advantage for
the financial sector is an unsettled empirical question” (EC, 2011b).



Incompatibility with EU treaties: The range of extraterritorial impacts due to the residence and
issuance principles of the proposal may make it “fundamentally incompatible” with EU treaties (The Law
Society, 2013). For example, it may be incompatible with procedures of enhanced cooperation (CBI, 2013;
Englisch et al., 2013) and/or the free movement principles established in the Treaty of Rome (e.g. distorting
capital flows). Additionally, the proposal “would amount to a barrier to trade between Member States”
(The Law Society, 2011) and “would create a distortion for competition” (House of Lords EU Committee,
2013). The proposal is currently subject to a legal challenge from the UK Government (Case C-209/13 UK v
Council) and the legal basis has been questioned by the European Council Legal Service (Barker, 2013).



Ability to pass burden to final consumers: Although the question of the incidence of the EC’s FTT is
empirically unresolved, many have suggested that it will be borne by the final consumer of financial services
rather than the financial service provider itself. “The belief that the cost of additional taxation of the
financial sector will be absorbed by the sector is a misconception of the way financial activities are
managed” (EBF, 2012). Furthermore, it has been suggested that the design and scale of the planned
adoption of the EC’s proposal would allow the costs of the tax to be passed onto final consumers, shifting
the tax burden away from the earnings of the FS sector (Oliver Wyman, 2013; IMF, 2010). It was these
concerns that led the IMF (2010) to favour the use of a financial activities tax (FAT) rather than a FTT in a
submission to the G-20.However, when considering such arguments it must be borne in mind that the

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extent to which the burden is passed onto the final consumer depends to a large extent on the profitability
and competitive dynamics of the FS sector and the elasticity of certain financial products.


Lack of focus on core sources of financial instability: That the design of the EC’s proposal, as with
other FTTs, does not target key attributes – such as institution size, interconnectedness, and substitutability
– that give rise to systemic risk (IMF, 2010). In fact, as Comotto (2013) suggests, financial stability may be
directly compromised as a result of adverse interactions with the current regulatory framework of the FS
sector. Additionally, the evidence regarding the volatility-reducing nature of FTTs is mixed.



Impact on financial markets: That the scope of the EC’s proposal covers a broad range of asset classes,
including sovereign debt which (EC, 2013a), when coupled with the ability for the FTT to cascade (Vella,
2012), means that it has the potential to generate significant impacts in the financial markets of both the
EU-11 and non-participating jurisdictions. A high-level discussion of these impacts can be found in sections
2.5.2 and 2.5.3, with a more detailed discussion in annexes 3 and 4.

2.4 Background to the FTT
The origins of the EC’s current proposal for a FTT can be traced back to an initial proposal for a harmonised
FTT for the European Union (EU) put before the Commission on 28th September 2011 (EC, 2011a). The EC’s
initial proposal had the following objectives:
1.


The legal basis of the EC’s proposal can be found in Article 113 or Article 115 of the Treaty on the Functioning of
the European Union (TFEU) which provides the grounds for the implementation of measures to harmonise
certain areas of tax legislation in order to promote the functioning of the internal market (EC, 2011b). It was in
this vein that the EC acted to protect against the emergence of a patchwork of taxes on financial transactions
unilaterally imposed by Member States that could compromise the functioning of the internal market, such as
through double taxation. At the time of writing of the EC’s first impact assessment, ten Member States had
unilaterally implemented country-specific taxes on the financial sector and several others were considering the
imposition of such taxes. As a result the EC concluded that (EC,2011b):
“the EU should lead efforts (...) for introducing systems for levies and taxes on financial institutions”.
EU-27 Finance Ministers failed to reach unanimous agreement on this initial proposal, but 11 Member States
expressed willingness to implement a harmonised FTT among themselves under the EU’s enhanced
cooperation procedure (EC, 2013a). The 11 Member States, known as the “EU-11”, are: Belgium, Germany,
Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.
Following a request to implement a FTT based on the scope and objectives of the EC’s initial proposal, the
Economic and Financial Affairs Council adopted a decision authorising the EU-11 to proceed with their plans
under the enhanced cooperation procedure on 22nd January 2013 (EC, 2013a).
The EC’s authorisation of the EU-11’s proposal evoked a mixed reception throughout a wide range of quarters
and, to a large extent, served to add impetus to the academic debate on FTTs and the principles of financial
service (FS) sector taxation. As would be anticipated, the business community, in particular the FS sector, has
reacted strongly to the proposal by launching a concerted effort to highlight the adverse consequences of EC’s
proposal for a FTT. Civil society on the other hand has demonstrated a high level of broad support for FTTs,
with non-governmental organisations (NGOs) and humanitarian and religious leaders propounding the
redistributive potentials of FTTs (CEPR, 2013). The support from civil society is best typified by the 2010 ‘Robin
Hood Tax’ campaign which drew support from a range of civil society actors including Christian Aid, Friends of
the Earth, Oxfam and UNICEF.

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In contrast to this, the academic community has largely retained an undecided stance on FTTs in light of the
EU-11 proposal. However, several prominent economists, such as Griffith-Jones, Krugman, Persaud, Sachs,
Stiglitz and Summers openly support the general concept of a FTT (CEPR, 2013), whilst others specifically
support the implementation of a FTT with a broad geographical scope, such as Schulmeister (2012):
“A general FTT has the potential to become the first supranational (European) tax and finally the first
global tax”
Perhaps the most notable divergence of opinions on the EU-11’s proposal has occurred within the European
Union itself, as several Member States, such as the UK and Sweden, have been openly critical. The EC’s
proposal and its possible future implications relating to the international tax system has been subject to much
debate within the UK government, with the House of Lords European Union Select Committee (2013) stating
that:
“In our last report, we concluded that ... the Commission's argument that an EU-wide FTT would
pave the way for the introduction of a global tax was wholly unrealistic ... This remains our view”
Indeed, at the time of writing, the EU-11’s proposal is in the discussion stage and is subject to a legal challenge
from the UK (Case C-209/13 UK v Council). Furthermore, the European Council’s Legal Service has also
recently questioned the legal basis for the FTT, suggesting that the extraterritorial impacts generated by the tax
would infringe upon the tax sovereignty of non-participating Member States (Barker, 2013).
The proposed FTT would apply to a broad range of asset classes and would function on the residence principle
and elements of the issuance principle (a full discussion of the proposal can be found in Annex 2). The current
proposal states that the FTT will apply to most trading in equity, sovereign debt, corporate debt, repurchase
agreements (repo) and derivatives (EC, 2013a). As the EU-11’s proposal currently stands, minimum rates of
0.1% will be levied on non-derivative transactions, including sovereign debt securities, and 0.01% on the
notional value of derivative transactions.
The proposed tax will apply on both the sell and buy side. A stated objective of the EC’s proposal is to make all
intermediaries in the transaction chain subject to the proposed FTT, creating a cascade effect that will increase
the effective tax rate. Every “material modification” to a transaction will also trigger a FTT tax liability.
Intermediary relief will be given for agency transactions 2 and exemptions will apply to Central Counter Parties
(CCPs), Central Securities Depositories (CSDs), primary market transactions (including underwriting),
transactions with international bodies or institutions and transactions that form part of restructuring
operations.

2.5 Key findings
The following sections summarise the key findings of this report as compiled from an extensive review of the
body of literature assembled to date on the EC’s proposal and the discussion of FTTs more generally.

2.5.1 Impact on households and non-financial businesses
The design of the EC’s proposal has attempted to insulate businesses and households from the impacts of the
FTT by ring-fencing day-to-day financial activities, such as lending and borrowing, from the scope of the tax
(EC, 2011a). This is to prevent the cascade effect being passed down to final consumers: however, there is a
distinct possibility that the cost of paying and collecting the tax is will be a “pass through” cost for corporate and
institutional users. Although it is too early to determine the precise impact, this will then have consequences in
terms of the economic viability of their market activities (including raising capital and managing risks) and on
market participation and liquidity.

Agency transactions refer to trades that are executed either upon instruction or discretion, by a broker or
dealer on behalf of a client.
2

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The likelihood that the incidence of the proposed FTT will fall partly on households and businesses cannot be
ruled out (Vella, 2012). For example, EFAMA (2013) claims that individuals investing in an Undertaking for
Collective Investment in Transferable Securities (UCITS) could see the value of their savings reduced by 15% of
their total contribution. Similarly, investors in actively managed pension funds could be significantly affected by
the FTT (CBI, 2013).

2.5.2 Impact on EU-11 financial markets
The literature on the EC’s proposal suggests that the FTT will have wide-ranging impacts on financial markets
and services and on the consumers of financial services across the EU-11 Member States.


Equity markets: The EC’s proposal is expected to have an impact on equity markets and their volatility;
however the direction of the impact is market-specific and highly contested in the literature. Several studies
point towards the volatility-reducing properties of FTTs, for example Becchetti et al.’s (2013) study of the
French FTT, whereas others have found that FTTs increase market volatility (Umlauf, 1993; Habermeier
and Kirilenko, 2003). Some commentators have found no evidence of such a relationship (Roll, 1989; Hu,
1998; Phylaktis and Aristidou, 2007). There are mixed views regarding the sensitivity of equity market
trading volumes to the imposition of FTTs. Additionally, a study by Oliver Wyman (2013) has estimated
that the EC’s FTT will generate a “one-off mark-to-market devaluation of €230-301bn, equivalent to 6-8%
of EU-11 market capitalisation” for EU-11 equities due to the capitalisation of transaction costs.



Sovereign and corporate debt markets: The EC’s proposal is expected to impact negatively on the
returns of both corporate and sovereign debt securities within and outside the EU-11, which could prompt
the issuers of such instruments to offer higher coupon rates to compensate investors for the tax liability
generated by the FTT. The incidence of the tax is expected to be higher for sovereign debt than for corporate
debt (London Economics, 2013). The impact as a proportion of the returns of corporate debt is estimated to
be 6-13% in participating member states and 7-14% in non-participating member states depending on
maturity (London Economics, 2013). 3 Whereas, the impact as a proportion of the returns of sovereign debt
is estimated to be 7-128% in participating member states and 7-208% in non-participating member states
depending on maturity (London Economics, 2013). 4



Repo markets: The cascade effect of the FTT is expected to generate significant impacts on the repo
markets of the EU-11. It has been suggested that the high effective interest rates generated by cascading and
lack of time apportionment in the computation of the tax liability will arguably make the small trade
margins of repo transactions unfeasible and could shrink the European market by 66% (Comotto, 2013).
Impacts on the repo market of this scale would arguably result in increased funding costs for businesses
(CBI, 2013) and may impact on the price of sovereign debt and the rate of return required by investors
(Oxera, 2011).



Money market funds: The FTT is expected to impact EU-11 money market funds in a similar way to the
repo market due to the comparable short-term and high frequency nature of the markets (AIMA, 2012).
EFAMA estimates that money market funds will bear a significant proportion of the tax burden, with an
estimated contribution of 67% of total FTT tax receipts (without accounting for taxpayer behaviour) if it had
been implemented in 2011 (EFAMA, 2011). It is estimated that this will impact on the annual investment
performance of such funds by at least 1% (EFAMA, 2013).



Derivatives markets: EU-11 derivatives markets are also predicted to bear a high burden of the FTT.
Oliver Wyman (2012) reports that the increase in direct costs on derivatives transactions as a result of the
FTT (and depending on the type of product) could be of a magnitude of 18 times the bid/offer spread in
normal market conditions. Estimates of the impact on trading volumes suggest a fall of between 70% and
90% (EC, 2013b; Schulmeister, 2011); however, the historical experience of national FTTs would suggest the
possibility of an even larger impact. For instance, the Swedish FTT resulted in a 98% reduction in the

Differences in the range of impacts on corporate debt for participating Member States and Non-participating
Member States are driven by differences in corporate capital structures.
3

Differences in the range of impacts on sovereign debt for participating Member States and Non-participating
Member States are driven by the low returns on UK government bonds with short maturities.
4

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trading of interest rate futures (Campbell and Froot, 1993). However, it must be noted that the unilateral
implementation of a FTT in conjunction with the use of the issuance principle, as in the Swedish case (EC,
2011b), can generate significant impacts on certain financial products. Impacts on derivatives markets are
also widely anticipated to negatively affect the risk management capabilities of the FS sector and the real
economy (Oxera, 2011; Deutsches Aktieninstitut and Oliver Wyman, 2013; CBI, 2013).

2.5.3 Wider impact
There are claims that the EC’s proposal could have a number of spillover effects beyond the EU-11 and the FS
sector, in addition to the impact on households and businesses mentioned above.
Firstly, most impact assessments conclude that that the EC’s proposal will have a negative impact on EU-27
GDP, with the level of estimated impacts ranging from a decrease of 0.28% (EC, 2013b) to 2.42% of GDP
(Oxera, 2011). Oxera’s estimate of 2.42% was published before the EC’s current estimate of 0.28%; however, in
a subsequent report, Oxera claims that the EC’s current estimate still “underestimates the impact of the FTT”
(Oxera, 2012). London Economics also argues that the EC’s estimate is too small and predicts a larger negative
impact of 1.0% of GDP (London Economics, 2013). By contrast, the EC claims that the long-run cost to GDP of
the tax has the potential to be even lower than 0.28%, if revenues from the tax are used to fund growthenhancing initiatives (EC, 2013b).
Secondly, it has been claimed that the proposed FTT could have extraterritorial impacts, such as by affecting
the cost of corporate debt outside the EU-11. For instance, London Economics (2013) predicts that corporate
issuers of debt in non-participating Member States may experience increases in the cost of funding due to the
cascading of the effective tax rate over the bond settlement chain, although this effect is not limited to bonds.
Using a bond settlement chain of 10 transactions, London Economics (2013) illustrates how the effective tax
rate of the settlement chain would be 100 basis points rather than the 10 basis points suggested by the statutory
rate of tax of the FTT.
Thirdly, to put the impact on GDP into context it can be compared against the revenue that the FTT might raise.
The latest EC impact assessment has estimated that the proposal, if implemented on 1st January 2014 5 in its
current form, will generate €34 billion annually, which represents approximately 0.25% of EU-27 GDP in 2014
(EC, 2013b). It has also estimated that, under its main scenario, the tax will have a negative impact on GDP of
0.28%, implying a marginal excess tax burden of 1.12 for the FTT in its current form. This means that for every
€1 of tax that the FTT raises it causes a loss of €1.12 of EU GDP. This is larger than the estimated marginal
excess tax burden of a number of taxes and also the FTT in its 2011 form, as shown in the table below.

This data was provided by EC in its latest impact assessment (EC, 2013b). However, the EC has since stated
that the FTT could enter into force “towards the middle of 2014” at the earliest (EC, 2013c).
5

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Table 1: Comparing the marginal excess burden generated by the EC’s proposal with other
taxes
Tax

Marginal excess tax burden
(loss of GDP divided by tax raised)

Data source

FTT – 2013 proposal

1.12

European Commission, 2013a

FTT – 2011 proposal

0.93

European Commission, 2011b

VAT

0.13

European Commission, 2012

Personal income tax

0.63


Corporate income tax

1.88


Source: European Commission, PwC analysis
The EC’s 2012 estimates for personal incomes taxes and corporate tax are perhaps higher than those observed
in the wider economic literature. There are a wide range of estimates relating to the impact of different tax
heads and economic growth and the OECD (2010) provide an extensive analysis and review of the topic. Some
examples of other estimates include: Johannsen (2008) who analyses the effects of a 5 percentage point cut in
corporate tax rates from 35% to 30% and finds a 0.08 (0.1) percentage point on TFP growth (median impact
over 10 years). While Gemmell (2013) suggest that a 1 percentage point increase in the top statutory rate of
corporation tax leads to a 0.02-0.04% reduction in the growth rate of GDP (equivalent figures for labour
income taxes would be -0.02 – 0.12% for the top statutory rate.
Finally, the EC’s proposal may have an impact on the location of financial activity, although the extent of this
impact is disputed in the literature. It has been claimed that the issuance principle of the FTT would limit
relocation of financial activity out of the EU-11, as transactions involving securities issued in or by participating
member states would be subject to the tax regardless of the location of the trade (EC, 2013b). However, it may
be the case that the imposition of such a tax could encourage relocation as financial institutions, businesses and
governments located in the EU-11 become more expensive trading partners due to the tax (Oliver Wyman,
2013); IBFed, 2013; Comotto, 2013). Similarly, the FTT may render financial services and products sold
worldwide more expensive and thereby less appealing, although as non-EU based financial institutions are not
bound by EU tax cooperation legislation the legal obligation to pay the tax is not there.

2.5.4 Lessons from national FTTs
A number of countries are currently implementing national FTTs and many have implemented them in the
past. Historical and contemporary FTTs have encountered varying experiences of implementation, with several
countries have collected significantly less revenue than initially expected, which has been generally linked to a
considerable fall in trading volume (discussed in Annex 5). Although there will be important lessons for the EC
from the experiences of these countries, most of these national FTTs were narrower in scope, design and indeed
geographical coverage than the proposed EU-11 FTT.
Of the countries considered, the most adverse experience of implementing a FTT appears to be Sweden, where
only 3% of expected revenue was generated (Campbell and Froot, 1993), with trading volumes of futures falling
by 98% and bonds by 85% (Wrobel, 1996). The UK’s experience with stamp duty has been less problematic,
although a study by Oxera (2007) estimates that stamp duty causes a GDP loss of between 0.24% – 0.78% per
year due to the influences of capital taxes on the level of investment in an economy.

2.6 Summary
The EC has put together a detailed case for the implementation of a FTT in the EU-11 and has been able to
benefit from a certain amount of public support, though the debate around the perceived impacts of the FTT is
highly polarised, with several competing arguments vying for prominence.

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The financial crisis has extracted a heavy toll on the global economy, the consequences of which can still be felt
in Europe and visibly shapes policy discussions relating to the FS sector and public financial management. To
this end, it has been suggested that the EC’s proposal will serve to compensate participating Member States for
the costs of the financial crisis by yielding additional tax revenues to aid fiscal consolidation (EC, 2011b). This
argument rests on the assumption that the FS sector is currently under-taxed and that it may indeed enjoy a
considerable tax benefit in the form of VAT exemption (EC, 2011c). However, as suggested in the literature, the
VAT exemption in fact burdens the FS sector with irrecoverable VAT (Gottfired and Wiegard, 1991; de la Feria
and Lockwood, 2010; PwC, 2011; Adam, 2011). Indeed, recent research examining the FS sectors of France,
Germany, Italy and the UK suggests that the sector bears a significant tax burden, and if subject to the average
effective tax rate of the whole economy would have contributed a total of €195 billion less in tax revenue for the
period 2006 to 2010 (PwC, 2013).
At a more fundamental level, the historical rationale, as put forth by Keynes, of market volatility reduction is
central to the EC’s proposal but is empirically questionable. This rationale features as a core policy objective of
the EC’s proposal, however in practice there is limited empirical evidence to adequately support this assertion,
with only a handful of studies providing empirical support (Westerhoff and Dieci, 2006; Becchetti et al.,2013).
Undeniably, excessive risk taking has damaged financial markets and it may be desirable to curb certain types
of order flow, although it seems far from proven given the weak empirical support that a FTT will achieve this.
Furthermore, Millar (2012) suggests that complex behavioural responses to the implementation of the EC’s FTT
could in fact encourage excessive risk taking rather than the opposite as intended. As Ertuk (2006) put it:
“If the Tobin Tax is not stabilising, then much of the rest of the discussion on its feasibility and other
related issues are probably moot.”
When viewing the FTT from a pragmatic perspective, the EC (2011b) has concluded that the implementation of
a FTT with a wide geographical base of participating jurisdictions in the EU would be desirable to prevent the
evolution of a patchwork of measures that could lead to complex behavioural responses to avoid such taxation,
as described by Millar (2012). To a certain extent, the EC’s proposal attempts to achieve this by harmonising the
tax treatment of financial transactions in 11 jurisdictions, a number of whom have already implemented, or are
due to implement, unilateral FTTs (France, Italy, Portugal and Spain). However, the implementation of a
European FTT that does not cover all Member States, and particularly one that only captures 55% of EU-27 FS
sector gross value added (GVA) in its base (as shown in figure 3), creates scope for complex behavioural
responses and relocation of financial activity to non-participating jurisdictions. When this is considered against
continued high levels of capital mobility – a trend that the EU directly helped to further – the case for the EC’s
proposal appears further weakened.

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Annexes

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Annex 1 – Key arguments for and
against the European
Commission’s proposal
A1.1 Introduction
In this annex we present several key arguments found in the literature that are both in favour of, and against,
the EC’s proposal. This annex is intended to serve as a summary of the arguments for and against the EC’s
proposal presented in the literature.
This annex is structured in the following way. Section A1.2 presents the arguments for and against 9 key areas
of debate in the literature on the EC’s proposal. Section A1.3 provides a brief summary of the arguments
presented in the previous sections.

A1.2 Table of key arguments
Table 2: Comparing the key arguments for and against the European Commission’s
proposal
Arguments for the FTT

Arguments Against the FTT

Costs of the Financial Crisis
May help governments to recover the costs of the
recent financial crisis and potential future financial
crises (EC, 2011b)
The FTT will help governments to consolidate their
budgets (EC, 2011b)

“Adjusting the [EC’s] modelling results to reflect more
realistic scenarios, the negative economic impact
could be greater and there is a risk that the imposition
of the FTT actually reduces total tax revenues from the
economy” (Oxera, 2013)
According to Carlo Cottarelli, head of the IMF’s fiscal
affairs division “there are other levies that could be
better than the Financial Transaction Tax” (Reuters,
2013). In a 2010 submission to the G-20, the IMF
concluded that the least economically distortionary
way of recovering the costs of the financial crisis
would be through the imposition of a Financial
Activities Tax (FAT) rather than a FTT (IMF, 2010b).

VAT Exemption of the Financial Services Sector
May compensate for the VAT exemption of financial
services which conferred a potential tax advantage to
the European FS sector of between €18.1bn and
€23.6bn in 2009 (EC, 2011b)

Further research conducted by PwC and Professor Ben
Lockwood has suggested that the VAT exemption in
fact burdens the FS sector with irrecoverable VAT,
estimated to be €33bn in 2007, constituting a hidden
tax on banks rather than on consumption as intended
(PwC, 2011). Additionally, the report suggests that the
removal of the exemption may serve to decrease
government tax receipts as the FS sector becomes able
to recover VAT (PwC, 2011).
The FS sector generates significant tax revenues. In a

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recent study of the FS sectors in four European
countries it was reported that the sector “generated a
higher proportion of the state’s total tax receipts than
its relative share of economic activity” (PwC, 2013).
The same study also found that if the FS sectors of
those countries were subject to the average effective
tax rate of the non-FS sector, they would have
generated €195bn less in tax receipts over the period
2006-2010 (PwC, 2013).
“The extent to which the [VAT] exemption constitutes
a tax advantage for the financial sector is an unsettled
empirical question” (EC, 2011b)

Impacts on the Households
“Private households and SMEs not actively investing
in financial markets would hardly be affected by this
proposal thanks to the ring-fencing features built in
the design of the FTT” (EC, 2011)

“Its real burden may fall largely on final consumers
rather than, as often seems to be supposed, earnings
in the financial sector ... This is more likely the more
general the adoption of the tax, since that helps
industry pass on the cost to its customers” (IMF,
2010a)

Impacts on Financial Stability
“It seems unlikely that [a FTT] would stabilise
financial markets but, if appropriately designed, it is
unlikely to destabilise them either” (McCulloch and
Pacillo, 2011)

A literature review by Schulmeister et al. (2008)
found ten studies reporting that transaction taxes
increase short-term price volatility and five studies
finding no significant relationship

Impact on High Frequency Trading
The FTT may help to discourage high frequency
trading (HFT) (EC, 2011; Buckley, 2012)

“It is of paramount importance that we continue to
investigate the effect of HFT, and short-term trading
more generally, on markets. At present, however,
existing evidence on the effect of HFT on market
efficiency is simply inconclusive” (Vella, 2012)

Addressing the Causes of the Financial Crisis
“To us and hundreds of other economists, the
evidence is clear that an FTT adopted by all 27 EU
states or by the 17 members of the eurozone would
help strengthen Europe's finances and reduce the
likelihood of crises” (Griffith-Jones and Persaud,
2012b)

A literature review

“We should be clear that the FTT does not address any
of the recognised causes of the recent crisis, such as
over-leverage and insufficient liquidity provisioning.
These can be addressed through other taxes, including
bank levies. The FTT purports to contribute to the
prevention of future crises not by dealing with the
recognised causes of the recent crisis but by dealing
with practices which are not known to increase the
risk of crises” (Vella, 2012)

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Impacts of the Rates of Tax
The proposed tax rates are too low to deter long term
investors (Buckley, 2012; Schulmeister, 2012)

Although dependent on the number of transactions in
a settlement chain, the effective tax rate will be higher
than the statutory rate for two reasons: (a) the FTT
cascades and (b) the FTT on derivatives is charged on
the nominal amount involved which can exceed the
price of the contract (Vella, 2012). Furthermore, the
increase in direct costs on derivatives transactions as a
result of the FTT (and depending on the type of
product) could be of a magnitude of 18 times the
bid/offer spread in normal market conditions (Oliver
Wyman, 2012).

Price Discovery Process
A FTT does not hamper the price discovery process
because asset markets are not efficient to begin with
(Schulmeister, 2012)

“An FTT hampers the price discovery process.
Furthermore, it is impossible to distinguish between
harmful speculation and beneficial transactions”
(Schulmeister, summary of publication by Claessens et
al., 2012)

Existing International Precedents
There are many financial transaction taxes already in
place today (EC, 2013; Persaud, 2013)

National FTTs are limited in design so they should not
be seen as a precedent for the European FTT (Bank of
America Merrill Lynch, 2013)

A1.3 Summary of key arguments
The arguments presented above identify important issues that can be used to evaluate the merits and
drawbacks of a financial transaction tax, and they should be assessed against economic theory and the empirical
evidence. The argument that the FTT may not raise significant revenue depends on the degree of transactional
and trading migration to non-FTT states (inside and outside the EU) and the extent to which trading volumes
fall in response to the tax. The EC’s revenue estimates are based on considerable falls in volume, such as 90% in
the derivatives market (EC, 2013). The argument that tax revenue generated by the FTT will be partially offset
by an increase in the cost of EU governments’ borrowing appears correct. However, the extraterritorial impacts
of the FTT are expected to increase the costs of government borrowing in non-participating Member States,
though these states will be unable to benefit from an offset against the receipt of tax revenue. For instance,
based on an £128.08bn issue of non-index linked gilts with a range of maturities by the UK government, the
FTT is estimated to increase the cost of UK government borrowing by £3.95bn, representing an absolute cost to
the UK (London Economics, 2013).
The extent to which households and SMEs are affected by the FTT appears difficult to determine, as it depends
on the success of the proposal’s ring-fencing measures, which include the broad exemption of common
household financial activities such as borrowing and payments. However, there are claims that businesses
which undertake risk management activities such as hedging are likely to experience a significant increase in
their costs (Oxera, 2011; London Economics, 2013; Deutsches Aktieninstitut & Oliver Wyman 2013). The
literature as to whether the FTT will reduce high frequency trading leaves the issue empirically unresolved,
despite there being considerable empirical evidence to suggest that the argument that a FTT will reduce
volatility is unsubstantiated.

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The size of the overall tax burden imposed by the FTT, and whether this size is significant, is a source of
disagreement in the current literature. For some investments, particularly those with a longer maturity, the FTT
may add only a marginal cost to the transaction. However, it has been suggested that in some markets the
accumulation of the ‘cascade effect’ may generate particularly high effective tax rates – a study by ESRI (2012)
uses an example of a €100,000,000 5-day repo to equate the FTT tax liability generated by the trade to an
annual interest rate of 14%. The size of these effective tax rates is also reflected in the possibility of large drops
in trading volume in the markets for repos and derivatives, which is described in Annex 3.
Additionally, there have been suggestions that the EU-11 FTT could be the first step to a global FTT. Although
the EU-11 FTT is certainly a first step, numerous subsequent steps are necessary to create a global FTT. This
seems unlikely given that 16 EU states6 declined to participate in the proposed EU FTT and with the EC noting
that “there was no momentum at all visible that could have been interpreted as giving impetus to such an
initiative” (EC, 2013a). The EC also states that a number of transaction taxes on financial instruments have
been put in place within the EU and across the world, which can prove instructive for the EC in the design and
implementation of the FTT. However, it is also true that a regional FTT with such a wide geographical scope has
never been implemented, so there will be a number of unique challenges of design and implementation facing
the EC which will limit the extent to which national FTTs can be used as a template.

The EC’s authorisation of the proposal from the EU-11 pre-dates Croatia’s accession to the EU. Consequently
the 16 Member States that declined to participate does not include Croatia.
6

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Annex 2 – Outline of the
European Commission’s proposal
A2.1 Introduction
In this annex we briefly explore the EC’s proposal with respect to its origin, objectives, participating
jurisdictions, scope, rates of tax, exemptions and application principles.
This annex is structured in the following way. Section A2.2 briefly discusses the origin of FTTs in academia, the
terminology used to refer to FTTs and the rationale for FTTs. Section A2.3 describes the EC’s objectives for
implementing a FTT. Section A2.4 identifies the participants of the EC’s proposal and discusses their economic
significance, including their contribution to EU GDP and FS sector GVA. Section A2.5 describes the financial
instruments which may be subject to the FTT, the proposed tax rates for transactions involving these
instruments, the generation of a cascade effect and the exemptions that may apply. Section A2.6 outlines the
residence and issuance principles and briefly discusses some of their implications.

A2.2 The origin of the FTT
The concept of a FTT is closely associated with Nobel Laureate economist James Tobin and is often referred to
as a “Tobin tax”.
The term “Tobin tax” has sometimes been used interchangeably with a specific currency transaction tax (CTT)
in the manner of Tobin's original idea. Recently, the term is becoming increasingly associated with FTTs.
However, the idea can be traced back to John Maynard Keynes who, in 1936, wrote:
“The introduction of a substantial government transfer tax on all transactions might prove the most
serviceable reform available, with a view to mitigating the predominance of speculation over
enterprise in the US”.
The rationale for the tax stems from the argument that excessive uninformed speculation in the financial
markets causes volatility. The original purpose, as presented by Keynes, of a FTT was to dissuade investors from
entering into short-term, speculative and potentially “unproductive trades”, in turn bringing stability to
markets and raising revenue for government.
In addition, Griffith-Jones and Persaud (2012a) state that reducing the level of speculative activity should in
principle encourage investors to examine investment opportunities from a longer-term economic perspective,
which is thought to be better for economic growth. However, this view is challenged by some market
participants who argue that the role of speculators is to absorb excess risk that other participants do not want
and to provide liquidity in the marketplace by buying or selling when no participants from the other categories
are available, thereby supporting long-term investments (Culp, 2010).

A2.3 The EC’s objectives for implementing a FTT
The main objectives of the EC’s proposal (EC, 2013a) are to:
1.



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The first objective provides part of the legal basis of the EC’s proposal by using Articles 113 and 115 of the TFEU
in order to guard against the emergence of a patchwork of unilaterally imposed FTTs that could create
distortions in the internal market (EC, 2011b).
The second objective includes specific policy objectives to (a) identify new sources of government revenue, (b)
recover the costs of the recent financial crisis from the financial sector, (c) cover the costs of potential future
financial crises and (d) compensate for the VAT exemption of financial services (EC, 2011b).
The third objective includes specific policy objectives to (a) “reduce incentives for excessive risk-taking and
short-sighted profit-seeking”, (b) “address specific risks posed by automated trading”, (c) reduce leverage (by
curbing the difference in the tax treatment of debt and equity) and (d) “reduce tax-induced economic
distortions” (EC, 2011b). However, there are a significant number of transactions which generate low
commissions and returns, which are not the subject of controversy, but which could be rendered uneconomic as
a result of the imposition of the EC’s FTT.

A2.4 Participating jurisdictions
The EC’s initial proposal, dated 28th September 2011 was for a common system of FTT at EU level (EC, 2011a).
However, after this proposal failed to find agreement between the EU-27, 11 Member States proposed
implementing the FTT among themselves using the EU’s enhanced cooperation procedure (EC, 2013a), which
as Englisch et al. (2013) outline, allows:
“a sub-group of Member States, subject to fulfilment of some conditions, to introduce measures that
only bind the participating Member States”.
The new proposal involves the following Member States: Belgium, Germany, Estonia, Greece, Spain, France,
Italy, Austria, Portugal, Slovenia and Slovakia. These Member States are collectively known as the “EU-11”. The
proposal received authorisation from the EU Council on 22nd January 2013 (EC, 2013a).
At the time of writing, this new proposal is subject to discussion and is subject to a legal challenge from the UK
government (Case C-209/13 UK v Council). The UK’s grounds of action are that the Council Decision
(2013/52/EU) is:
1.

contrary to Article 327 of the Treaty on the Functioning of the European Union (TFEU) because it
authorises the adoption of a FTT with extraterritorial effects which will fail to respect the competences,
rights and obligations of the non-participating states;

2. unlawful because it authorises the adoption of a FTT with extraterritorial effects for which there is no
justification in customary international law;
3. contrary to Article 332 TFEU because it authorises enhanced cooperation for a FTT, the implementation of
which will inevitably cause costs to be incurred by the non-participating states.
In addition to the UK government’s legal challenge, the European Council’s Legal Service has also recently
challenged the legal basis for the FTT, suggesting that the extraterritorial impacts generated by the tax would
infringe upon the tax sovereignty of non-participating Member States (Barker, 2013).
The EU-11 constitutes a large share of economic activity within the EU-27, accounting for approximately twothirds of EU-27 GDP. 7

The EC’s authorisation of the proposal from the EU-11 pre-dates Croatia’s accession to the EU as the 28th
Member State. Consequently, the measures of EU GDP and FS sector GVA do not include Croatia.
7

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Figure 2: Comparing the GDP of EU-11 countries with the GDP of non-EU-11 countries in
the EU-27 (2010)
33%
EU-11
non EU-11
67%

Source: Eurostat, PwC analysis
In addition, the EU-11 financial services (FS) sector constitutes more than half of all EU-27 FS sector economic
activity (measured by Gross Value Added, GVA).

Figure 3: Comparing the FS sector GVA of EU-11 countries with the FS sector GVA of nonEU-11 countries in the EU-27 (2010)

45%
55%

EU-11
non EU-11

Source: Eurostat, PwC analysis

A2.5 Scope, rates and exemptions
The proposed FTT would apply to a broad range of financial transaction conducted by the FS sector and certain
types of financial activity located outside the FS sector. The current proposal states that the FTT will apply to
most trading in equity, sovereign debt, corporate debt, repurchase agreements (repo) and derivatives (EC,
2013a).
The EC’s proposal states that a minimum rate of 0.1% will be charged in the case of financial transactions other
than those related to derivatives contracts. In respect of derivative contracts, the proposal states that a
minimum rate of 0.01% will be charged on the notional value of the underlying contract of derivative
transactions will be collected.
The tax would apply on both the sell and buy side. The current design of the proposal also states that the tax will
be payable at each level of intermediation in a transaction chain, creating multiple layers of taxation. This is
known as a cascade effect, and will act to increase the effective tax rate on a transaction above the proposed
headline rates of 0.1% and 0.01%. Additionally, every ‘material modification’ to a transaction will trigger a FTT
liability, with intermediary relief being given for agency transactions.
The cascade effect generated by the FTT is a significant aspect of the EC’s proposal. As mentioned above, a FTT
liability is generated on every material modification to a transaction that is within the scope of the tax, which
will lead to multiple layers of taxation over a transaction settlement chain. The EC’s (2013a) proposal has
defined a modification as material for tax purposes when:

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“it involves a substitution of at least one party, in case the object or scope of the operation, including
its temporal scope, or the consideration agreed upon is altered, or where the original operation would
have attracted a higher tax had it been concluded as modified”.
Figure 4 demonstrates how the FTT will generate a cascade effect using an illustrative non-derivative
transaction taxed at the EC’s proposed minimum rate of 0.1% with two intermediaries in the transaction
settlement chain.8 As the asset in question moves between the various intermediaries, FTT liabilities are
generated on both the buy and sell side of the transaction whenever a party is substituted. As the hypothetical
and stylised example in Figure 4 suggests, the FTT would generate an effective tax rate of 0.6% over the
transaction settlement chain, which is in excess of the statutory rate of 0.1%. London Economics (2013),
conduct a similar exercise for a representative bond settlement chain involving 10 transactions which reveals an
effective tax rate of 1.0%. This effect holds for transactions involving derivatives, although each material
modification will be subject to a minimum rate of tax of 0.01%. Furthermore, it must be borne in mind that
intermediaries in a transaction settlement chain may be entitled to intermediary relief for agency transactions,
which will remove a layer of taxation from the cascade effect.

Figure 4: Illustrative FTT cascade effect on a non-derivative transaction
Intermediary
A

Vendor

0.1%

0.1%

0.1%

Intermediary
B

0.1%

0.1%

Purchaser

0.1%

Exemptions will apply to Central Counter Parties (CCPs), Central Securities Depositories (CSDs), primary
market transactions (including underwriting), transactions with international bodies or institutions and
transactions part of restructuring operations. It should be noted that, as currently proposed, there will be no
exemptions for market makers or pension funds.
There will also be no exemption for risk management transactions, such as hedging. The introduction of an
exemption for such transactions may prove difficult or controversial. Conversely, the lack of an exemption for
such transactions runs counter to the post-crisis economic objective of facilitating and encouraging better
standards in risk management.

A2.6 The residence and issuance principles
The proposed tax incorporates the residence principle and elements of the issuance principle.
The residence principle implies that worldwide branches of institutions registered in the EU-11 can be taxed
and that all counterparties to a trade with EU-11 entities that reside outside the EU-11 will be liable to pay the
FTT. The issuance principle implies that worldwide transactions of instruments issued in the EU-11 can be
taxed regardless of the geographic residence of the entities party to the transaction.
Within the EU-27, these principles may be required by the EU regime for mutual assistance on tax matters or
the imposition of joint and several liability on financial institutions within the EU-11.
This could mean, for example, that exchanges outside the EU-11 but within the EU-27 could be required to
implement mechanisms for collecting the tax.

This is an illustrative transaction and is not intended to be representative of non-derivative transaction
settlement chains found in European financial markets.
8

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Annex 3 – The impact of the FTT
on EU-11 financial markets
A3.1 Introduction
In this annex we assess the expected impact of the FTT on the key financial markets of the EU-11, and we also
evaluate the impacts of previous FTTs on financial markets. The range of effects that we have evaluated include,
the volume of trading in the market, the volatility of the market and the knock-on effects on other financial
markets.
This annex is structured in the following way. Section A3.2 briefly discusses the impact on EU-11 equity
markets, focusing on the market volatility and transaction costs. Section A3.3 outlines the impact on the
issuance of sovereign debt by the EU-11. Section A3.4 identifies the impact of the proposal on EU-11 corporate
debt markets. Section A3.5 describes the impact on the repo market, and briefly examines the wider
consequences of this. Section A3.6 outlines the impact on money market funds operating in the EU-11. Section
A3.7 discusses the impacts on EU-11 derivative markets. Section A3.8 considers the impact on risk management
capability. Section A3.9 summarises the key points discussed in the previous sections.

A3.2 Impact on the equity market
The equity market is where shares are issued and traded. Equity markets are important because they provide
liquidity to investors allowing assets to be easily traded, while they provide businesses that issue shares with an
important method of raising funds.
There is a significant base of research that that has investigated the impact of FTTs in equity markets, due to the
number of countries which have already implemented transaction taxes in this market. The hypothesis that
FTTs serve to reduce volatility in equity markets is largely contradicted by the empirical evidence, with most
studies finding that FTTs either increase or have no effect on market volatility.
A study by Pomeranets and Weaver (2011) on the effect of changes in a New York FTT on equity transactions
over a period of 50 years found a positive and statistically significant relationship between FTTs and market
volatility. Studies on Sweden’s 7-year experience with FTTs also found that they contributed to increased equity
market volatility (Umlauf, 1993 and Habermeier and Kirilenko, 2003), while similar results were found for the
Chinese stock market after an increase in the FTT rate (Zhang, 2001 and Baltagi, Li and Li, 2006).
There are also a number of studies which find that FTTs have had no effect on equity market volatility in
countries such as the UK, Japan and Taiwan (Roll, 1989, Hu, 1998 and Phylaktis and Aristidou, 2007).
However, there are few studies which find that FTTs have reduced market volatility: from four papers which
summarise the results of a large number of other studies on FTTs and volatility, only two studies were identified
that find empirical evidence of this relationship (CME Group, 2010; Culp, 2010; Pomeranets, 2012; Anthony et
al., 2012). A more recent study by Becchetti et al. (2013) on the effects of the implementation of the French FTT
on individual stocks empirically demonstrates reduced intraday volatility with insignificant impacts on
liquidity, attesting to the volatility-reducing properties of FTTs.
The theory that higher transaction costs (for example from FTTs) result in lower volumes of trading is wellsupported by the empirical evidence (McCulloch and Pacillo, 2011), although the sensitivity of volume to
transaction taxes varies considerably across countries and markets. The volume of trading in the equity market
is found to be particularly sensitive to changes in FTTs, with a median percentage change in volume of 1% of
transaction value for every 1% change in transaction tax, compared to 0.025% for foreign exchange and futures
markets. For the EC’s FTT in particular, TABB Group (2013) estimate that if it was implemented at the start of
2013, total European equity trading volumes could be 10.2% lower by the end of 2013 than would otherwise be
forecast, representing a 0.7% decline in trading volume relative to 2012.

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The sensitivity of equity market volume to transaction costs implies that the introduction of a FTT may result in
the migration of trading to other locations. This occurred in Sweden when the doubling of the transaction tax
caused 50% of trading volume to move to the UK within four years (Anthony et al., 2012), and in New York
when a FTT on the NYSE caused a migration of volume into the regional exchanges of the US (Jones and
Seguin, 1997).
Higher transaction costs generated by the imposition of a FTT can also impact on equity prices as
counterparties to a transaction attempt to price in the tax liability when buying or selling. Such impacts can be
observed through the analysis of the changes to equity market indices during the implementation of a FTT or
subsequent changes to the rate of tax. In a recent study by Oliver Wyman (2013), it was estimated that the EC’s
FTT would result in a “one-off mark-to-market devaluation of €230-301bn, equivalent to 6-8% of EU-11 market
capitalisation” for EU-11 equities due to the capitalisation of the costs of the FTT by investors.When analysing
the impact of Sweden’s FTT, Umlauf (1993) finds that Sweden’s All-Equity Index fell by 2.2% on the first day of
implementation and 0.8% on the day the rate increase to 2% became effective. Similar impacts have been
observed in the UK’s equity market index in relation to stamp duty, with the index falling by 3.3% on the day
that the rate of tax was doubled from 1% to 2% (Saporta and Kan, 1997). Indeed, these impacts are not confined
to European equity markets as Hu (1998) finds that the announcement of rate changes to stock transaction
taxes effected returns on equity market indices in Taiwan and Korea, with average returns on announcement
day being -1.6% and -0.6% respectively and high statistical significance for the Taiwanese result.

A3.3 Impact on the sovereign debt market
The sovereign debt market consists of bonds issued by national governments. It is an important market because
changes in the issuance cost of a country’s sovereign bonds can affect market appetite and the cost of
government borrowing.
The introduction of a FTT is expected to increase government borrowing costs for countries in and out of the
FTT zone as attempts are made to compensate investors for the impacts on returns the FTT tax liability will
generate (Matheson, 2011; Bijlsma et al., 2011; BUSINESSEUROPE, 2012b; Oliver Wyman, 2013). London
Economics (2013) estimates the impact as a proportion of the returns of sovereign debt to be 7-128% in
participating member states and 7-208% in non-participating member states depending on maturity. The
increase in the upper bound of impacts for non-participating Member States is driven by the low returns on UK
government bonds with short maturities (London Economics, 2013). London Economics (2013) also estimates
that the FTT would increase the cost of UK government borrowing by £3.95bn based on a forecasted gross
issuance of £128.08bn of non-index linked gilts of a variety of maturities for 2013. As this would be an absolute
cost for the UK government, this shortfall would need to be compensated for by an increase in taxes or a
reduction in public spending, whereas increased public debt for participating Member States would be
somewhat offset by FTT revenue, an estimated total of €34bn (EC, 2013b).
The incidence of the tax is expected to be larger for sovereign debt than corporate debt, with an expected fall in
the returns to bonds with 4-6 years maturity of 11.6% for sovereign debt and 6.8% for corporate debt (London
Economics, 2013). The increase in the cost of sovereign debt is also expected to contribute to some of the
increase in the cost of corporate debt as it causes a ripple effect through the economy (CBI 2013).

A3.4 Impact on the corporate debt market
The corporate debt market consists of bonds issued by businesses. This is an important market because
corporate bonds provide an important source of finance for many businesses.
It has been suggested that the cost of funds for non-financial corporations may rise by between 44 and 212 basis
points as a result of the FTT, with the cost for non-participating Member States being potentially higher than
for Member States (London Economics, 2013). Oliver Wyman (2013) estimates that the FTT would create an
annual cost of €7 to 8 billion for EU-11 corporates due to the increased costs of corporate financising arising
through impacts to corporate debt and equity markets.The empirical evidence also identifies that imposing
FTTs has driven down asset prices in countries such as Sweden, Japan and the UK, which subsequently causes
an increase in the cost of capital for corporate security issuers (Culp, 2010; Matheson, 2011).

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In addition, Oxera (2011) warn that an increase in the cost of corporate treasury activities such as hedging
would cause greater volatility and discourage activities such as exporting. These risk management functions
involve a chain of transactions, so the FTT would therefore generate a ‘cascade’ effect, resulting in a much
higher final tax. The FTT would also be expected to cause a re-intermediation of corporate financing away from
corporate bonds and towards bank lending not included in the tax (ESRI, 2012).

A3.5 Impact on the repo market
The repurchase agreement (repo) market consists of sales of securities which include an agreement to buy them
back at a later date. This market is important because businesses and governments use repos for short-term
borrowing and to manage their collateral.
As a market consisting of short-term funding and small trade margins, the combination of ‘cascade effects’
created by the FTT and the lack of time apportionment in the computation of the tax liability are expected to
have a significant impact on the repo market (Mayert and Wegner, 2010; Bierbrauer, 2013). A number of
studies have assessed the effective interest rates imposed by a FTT, with ESRI (2012) estimating an annual
interest rate of 14% levied on an example 5-day repo, compared to the ECB marginal lending facility rate of
1.75%. The effect of taxing repos could be to make many transactions uneconomic (Oliver Wyman, 2013; Oxera,
2013). London Economics (2013) states that the FTT will have “deleterious effects on the repo market”, Oliver
Wyman (2013) suggest that “repo instruments with maturities of less than one year to no longer be viable”,
while impact assessments have estimated that the European repo market will shrink by 66% (Comotto, 2013).
The potential consequences of these changes to the repo market are thought to include an increase in the cost of
lending to businesses as banks and other investors turn to more expensive markets for short-term funding (CBI,
2013). Banks will also be forced to hold greater volumes of cash and fewer government securities in order to
maintain liquidity, which will drive down the price and increase the required rate of return on government debt
(Oxera, 2011). However, it has been claimed that by increasing the cost of repurchase agreements a FTT would
discourage the practice of “window-dressing”. This refers to the exceptional practice of using financial
instruments, such as repos, in order to improve the appearance of balance sheets (Schäfer, 2012).

A3.6 Impact on money market funds
Money market funds are investment funds containing a portfolio of short-term securities, which have the
objective of maintaining a steady net asset value. They are important because they aim to offer investors a safe
investment with a given rate of return.
The FTT is expected to impact money market funds in a comparable manner to repos, due to their similar
short-term and high frequency nature (AIMA, 2012). Because of these characteristics, it is expected that money
market funds would bear a large proportion of the total tax burden from a FTT. EFAMA’s impact analysis (2011)
estimates that if the FTT was implemented at the beginning of 2011, then money market funds would have
contributed 67% of total revenue from the tax without taking into account behavioural reactions to its
imposition. Academics often claim that the cost of a FTT on investment funds will ultimately accrue to the
investor (McConnell, 1995; Malkiel and Sauter, 2009). For example, in the case of money market funds Culp
(2010) states that the tax incurred will “almost certainly” be passed through to investors, for example through a
lower return on their investment.
The tax charge from the FTT on a typical money market fund is estimated at 100 basis points a year (Goldman
Sachs, 2013), and the annual investment performance of money market funds is expected to fall by at least 1%
per year (EFAMA, 2013). This would have a serious impact on the business of money market funds and trigger
behavioural reactions causing a shift in demand towards deposit products instead, which are not included in the
FTT (ESRI, 2012). Because money market funds are expected to make a substantial contribution to FTT
revenue, the extent to which demand shifts to other products such as deposits (or to other locations outside of
the FTT zone) will be a significant factor in the FTT’s revenue-generating capacity.

A3.7 Impact on the derivatives market
The derivatives market consists of instruments whose values are based on the performance of underlying assets
such as stocks, foreign exchange, bonds and commodities. Derivatives are important because they allow

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companies, other organisations in the real economy and those involved in proprietary investment in the FS
sector to hedge against fluctuations in economic indicators such as exchange rates, interest rates, financial and
commodity prices and other forms of business risks.
The EC’s impact assessment of the FTT estimated that the tax would have a significant effect on the derivatives
market, reducing trading volume by between 70% and 90% (EC, 2013b). This is because the ‘cascade effect’ of
the FTT is expected to have a significant impact on the costs of derivatives (Bijlsma et al., 2011; ESRI, 2012). A
study by Schulmeister (2011) predicts a similar fall in volume as a result of the European FTT, whilst evidence
suggests that Sweden’s introduction of a FTT led to a 98% reduction in the trading of interest rate futures
(Campbell and Froot, 1993). The revenue-raising potential of the FTT is sensitive to the impact on derivatives
trading, including derivatives traded by money market funds, with the European Commission estimating that if
the fall in derivatives volumes were 90% rather than 70%, then tax revenue would fall from €34 billion to €20
billion. However, this latter estimate is controversial because if trading volumes decrease by 90%, it could be
impractical to collect tax from the remaining 10%.
In addition, the FTT could have a substantial impact on derivatives’ bid-offer spreads. Oliver Wyman (2012)
reports that the increase in direct costs on derivatives transactions as a result of the FTT (and depending on the
type of product) could be of a magnitude of 18 times the bid/offer spread in normal market conditions.
The impact on trading volume can also be predicted by empirical estimates of ‘elasticity’, defined as the
percentage change in trading volume for a 1% increase in tax. For futures markets, Chou and Wang (2006)
report an elasticity of –1. By calculating elasticity with respect to the bid-offer spread, other estimates can be
obtained. Wang and Yau (2000), Wang et al. (1997) and Chou and Wang (2006) analyse futures markets and
report elasticities between –2.6 to –0.6. As these estimates all calculate elasticity with respect to a component
of transactions costs (such as the tax or bid-offer spread), the elasticity with respect to total transactions costs
will be even larger.
The impact of the FTT on the price of derivatives is more difficult to assess as no initial investment expenditure
is made, and a study by Culp estimates that the impact of FTTs on price is ambiguous (Culp, 2010). It has been
suggested that the FTT in its current form creates a bias away from bonds and equities and towards derivatives
as the proposed tax rate on derivative instruments is only 0.01% compared to 0.1% for bonds and equities.
(AIMA, 2012). However, as Vella (2012) outlines, as the FTT would be levied on the notional amount rather
than the price of a derivatives contract, the EC’s proposal has the potential to generate effective tax rates that
could influence investment decisions.

A3.8 Impact on risk management capability
In part due to financial innovation and market deregulation, risk management has become a core component of
the day-to-day activities of FS sector and the real economy. Risk management in financial markets primarily
relates to the use of derivatives to hedge against various market risks. However, more broadly, it also relates to
the capital adequacy requirements placed on financial institutions to manage systemic risk, although this is
discussed more fully in section A4.4 of Annex 4.
The subject of risk in financial markets features prominently in the policy rationale for the EC’s proposal and
has shaped much of the subsequent discussion on the impacts of the FTT. Indeed, the EC’s FTT is designed to
reduce incentives for excessive risk taking by making socially undesirable transactions uneconomical (EC,
2011b). As von Weizsäcker and Darvas (2010) illustrate, a FTT with a sufficiently low rate of tax could drive out
socially undesirable transactions while maintaining the viability of socially desirable ones. However, what
constitutes a ‘socially desirable transactions’ is neither defined in von Weizsäcker and Darvas (2010) nor in the
EC’s proposal (EC, 2011a; EC 2011b), creating ambiguity as to the likely impacts on the use of financial products
for socially desirable risk management practices.
Despite the lack of clarity regarding the classification, certain areas of the literature have found that the EC’s
FTT would have substantial impacts on the risk management capabilities of the FS sector and the real economy.
As outlined in the previous section, the EC’s proposal will have significant impacts on the derivatives market by
affecting the costs of derivatives through the cascading of the effective tax rate (Bijlsma et al., 2011; ESRI, 2012)
and reducing trading volumes (EC, 2013b). In turn, this is anticipated to have a direct impact on the risk
management capability of FS sector and the real economy (Oliver Wyman, 2013; Oxera, 2011). Recent research

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by Deutsches Aktieninstitut and Oliver Wyman (2013) estimates the impact of the FTT on risk management
trades conducted by companies in the German real economy to be €1.0 to €1.9 billion annually. A further study
by Oliver Wyman (2013) estimates an annual cost of €1 to 3 billion to EU-11 corporates for exchange and
interest rate risk management and suggests that the taxation of intra-group derivative transactions for risk
management pruposes could generate a significant impacts. More specifically, the use of derivatives to manage
price risks in energy markets will be similarly affected by the FTT and could ultimately result in increased
energy prices in the real economy (EUROPEX, 2013).
Furthermore, as some research suggests, the impacts of the FTT on risk management capabilities in the FS
sector and the real economy, may translate into impacts for households. As the CBI (2013) describe, the FTT
may interact with the use of derivatives for risk management purposes in actively managed pension funds to
negatively affect the performance of portfolios held by households.

A3.9 Summary
The available literature suggests that the impact of the FTT will differ considerably across the different financial
markets of the EU-11, and that it will also cause knock-on effects between markets.
There is a large base of evidence assessing the impact of FTTs on the equity market, which generally suggests
that transaction taxes cause trading volumes to fall but without any attendant decrease in market volatility – in
a number of cases, volatility was in fact found to increase (McCulloch and Pacillo, 2011, Pomeranets and
Weaver, 2011 and Anthony et al., 2012).
In the sovereign and corporate debt markets, issuance costs are expected to increase significantly as a result of
the FTT (London Economics, 2013; Comotto, 2013). The incidence of FTT is expected to be larger in the
sovereign debt market, although in the corporate debt market the largest costs will fall on Member States
outside of the EU-11.
The reaesrch available tends to suggest that the markets for repos, money market funds and derivatives may all
experience a significant fall in volume as a result of the FTT due to their high frequency nature creating a
‘cascade’ effect where the tax accumulates. Impact assessments have estimated that the European repo market
will shrink by 66% (Comotto, 2013), while the derivatives market will shrink by between 70% and 90% (EC,
2013b). Impacts on the derivatives market will in turn affect the risk management capability of the FS sector
and the real economy (Oxera, 2011). Money market funds and derivatives have been identified as major
contributors to the tax income from FTT, so its revenue-raising ability will be largely determined by the impact
on the volume of these markets (EFAMA, 2013; European Commission, 2013).

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Annex 4 – The wider impact of the
FTT
A4.1 Introduction
In this annex we examine the anticipated wider impacts of the EC’s proposal with respect to the impact on
households and businesses, GDP, financial stability, extraterritorial impacts and the impact on the location of
financial activity.
This annex is structured in the following way. Section A4.2 briefly lists the anticipated impacts of the FTT on
households and businesses. Section A4.2 examines the range of estimates of the cost to GDP of the FTT
described in the literature. Section A4.3 explores how the design features of the FTT will impact on the stability
of financial markets, as described in the literature. Section A3.4 indentifies the extraterritorial impacts of the
FTT listed in the literature. Section A4.5 describes the nature of the impact on the geographic location of
financial activity that the FTT is likely to have. Section A4.6 provides a summary of the key findings of this
section.

A4.2 Impact on households and businesses
The EC (2011a) claims:
“Private households and SMEs not actively investing in financial markets would hardly be affected by
this proposal thanks to the ring-fencing features built in the design of the FTT”
Furthermore, the EC seeks to insulate businesses and households from the FTT by excluding their borrowing
and lending activities and other day-to-day financial activities such as payments.
However, many studies note that this does not mean that households and businesses will not bear the economic
incidence of the tax (e.g. Vella, 2012). It is not the case that the FTT can be passed on to households only if they
invest in an investment fund or purchase shares. Aside from any direct impact on them of the FTT, there is
nothing to prevent the tax being passed on as a simple “pass-through” cost for such end users.
For example, it is argued:


“for most transactions, it would seem sensible to assume that the pass-through of the tax from traders to
investors or companies is close to 100%, including any intermediate transactions” (Oxera, 2011);



that ordinary citizens investing in UCITS would see the value of their savings reduced by 15% of their total
contribution as a result of the FTT (EFAMA, 2013);



that the EU FTT would adversely impact energy trading through “disturbances in the price formation
mechanism in addition to higher trading costs” which, if passed onto the real economy could “ultimately
result in higher energy prices” (EUROPEX, 2013).



that the EU FTT is likely to “predominantly hit the real economy (pension funds, asset managers,
insurance companies and corporates) as both direct and indirect costs will largely be passed on to the end
users; these end users will be the least able to move transactions to jurisdictions not subject to the tax”
(Oliver Wyman, 2012);



that “those who would carry the economic burden of the FTT would not be the banks but workers and
consumers in general, and their burden would be more than 100% of the revenue raised by the FTT”
(Worstall, 2011);

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

that many pension funds and schemes which use derivatives to manage their portfolio risk actively, as well
as to optimise investment performance, could be adversely impacted by the changing economics of risk
management (CBI, 2013).

Expanding on the last point, some authors highlight the potential for pension funds and schemes to be affected
by a FTT-induced fall in equity prices. For example, Anthony et al. (2012) argue that the FTT would reduce the
prices of equities in the short-term, as potential buyers of equities take into account the higher transaction cost
when buying or selling, and that “the burden of this drop will fall most heavily on those holding the largest
fraction of such investments, pension funds and wealthy individuals”.
Moreover, as Schich and Kim (2010) explain, other market participants that manage risk actively could also
experience higher costs:
“A key challenge associated with financial-transaction taxes is that their imposition cannot
realistically depend on the motive for particular transactions, and so they would not only affect
transactions that might ultimately lead to booms, bubbles and financial crises, but might also affect
socially desirable financial transactions, such as the hedging of risk. Distinguishing desirable from
undesirable financial transactions is difficult, if not impossible, since identical transactions can
involve either hedging or speculative considerations”
Some studies have attempted to quantify the impact of both the EC’s proposal, and examples of other national
FTTs. For example, Oxera (2007) estimates that UK stamp duty, which has a significantly narrower scope than
the Commission’s proposal, reduces the average occupational pension fund at retirement by £6,441, increasing
to £11,538 for equity-based portfolios (in 2006 money). It also concludes that abolition of stamp duty could
result in an increase in annual fixed business investment of FTSE 350 companies of £2.7 billion – £6.4 billion.
A more recent study of the impact of the EC’s proposed FTT on German households estimates that the annual
tax cost would be €48 - €62 per household, with pensioners bearing a higher annual burden of €118 - €132
(Deutsches Aktieninstitut & Oliver Wyman, 2013). Additionally, the FTT would serve to reduce the size of the
pension resulting from a typical Riester9 savings plan by 10%, equating to approximately €380 per year
(Deutsches Aktieninstitut & Oliver Wyman, 2013).

A4.3 Impact on GDP
Nearly all assessments suggest that the impact on GDP will be negative. However, the size of the impact is
subject to some debate.
The EC currently estimates that GDP will be reduced by 0.28% as a result of the increase in the cost of capital
(EC, 2013b). A similar estimate can be obtained from a study by Gilchrist et al. (2010), who find that a 0.25%
higher spread on corporate bond yields could decrease GDP after 20 years by roughly 0.2%, implying that a
0.15%-0.3% increase in the cost of capital could result in a 0.1% - 0.25% decrease in GDP.
However, Oxera predicts a more severe reduction of 2.42% of GDP (Oxera, 2011). Although Oxera’s estimate of
2.42% was published before the EC’s current estimate of 0.28% and therefore does not reflect any changes in
the underlying assumptions made between the EC’s first and second impact assessment, a subsequent report
claims that the EC’s current estimate still “underestimates the impact of the FTT” (Oxera, 2012). London
Economics also argues that the EC’s estimate is too small and predicts a larger negative impact of 1% of GDP
(London Economics, 2013). Anthony et al. (2012) predict a reduction in GDP of between roughly 0.4% and
1.2%. BUSINESSEUROPE (2013) also raises concerns that “this tax, by raising the cost of capital and
encouraging business relocation, will damage growth and jobs”.
Assessments of the effects of the UK stamp duty also point towards a negative impact on GDP. For example,
Oxera (2007) estimates that abolition of the UK stamp duty would result in a permanent increase of GDP of
between 0.24% and 0.78%.

9

A Riester savings plan is a pension-saving product subsidised by the German government.

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However, the EC claims that the long-run impact of the European FTT could be less severe. It predicts that the
impact could be between a 0.1% reduction and a 0.1% rise in GDP if revenues from the tax are used to fund
initiatives that may enhance growth (EC, 2013b).

A4.4 Impact on financial stability
In its initial proposal, the EC (2011a) states:
“The present proposal aims at complementing the EU regulatory framework for safer financial
services ... so as to avoid the repetition of past practices”
There are mixed views on the potential of the European FTT to improve the stability of financial markets.
On the one hand, Griffith-Jones and Persaud (2012b) claim that there is clear “evidence” that financial crises
would be less likely:
“To us and hundreds of other economists, the evidence is clear that an FTT adopted by all 27 EU states
or by the 17 members of the eurozone would help strengthen Europe's finances and reduce the
likelihood of crises”
One possible explanation for this, according to Persaud (2013), is:
“When the financial system is working smoothly, few worry about the huge number of offsetting
trades (for example, via derivatives) that are built on top of small exposures. But when the music
stops and counterparties can no longer be trusted, it is these gross exposures that bring down the
banks. In a number of different ways, this small tax on churning would limit some of these activities”
At a conceptual level Persaud’s explanation is valid, however it does not take account of certain practical
realities that the implementation of a FTT may have. For instance, an increase in transaction costs may
dissuade investors from participating in hedging transactions to manage the risk of their exposures. If this is the
case, multiple exposures will go unhedged, increasing the risks in the economy (and leaving more agents with
unhedged risks).
Moreover, some organisations criticise FTTs for not being focused on the core sources of financial instability
(IMF, 2010a; BUSINESSEUROPE, 2012b). For example, in its report for the G20, the IMF (2010a) states:
“An FTT would not target any of the key attributes—institution size, interconnectedness, and
substitutability—that give rise to systemic risk”
Indeed, the IMF suggest that the implementation of a tax on the FS sector, such as a FTT, would need to
consider the interaction with the current and future regulatory environments of the sector in order to achieve
synergies towards financial stability (IMF, 2010b). Comotto (2013) goes further and says that financial stability
would in fact be compromised by the tax as it would interact adversely with the regulatory framework of the FS
sector. He claims that it would make the movement of collateral in the EU-11 prohibitively expensive, thereby
reversing the trend towards the collateralisation of financial transactions promoted under the Basel regime and
giving rise to greater levels of operational and financial risk.
The OECD is also opposed to a general transaction tax “due to the negative impact it could have on liquidity in
otherwise open and transparent markets”, according to a Special Advisor to the Secretary General of the OECD
for Financial Markets and the Deputy Director of the OECD Directorate for Financial and Enterprise Affairs
(Blundell-Wignall and Atkinson, 2011). In addition, BUSINESSEUROPE (2012a) argues that “the FTT does not
resolve the weaknesses [in the financial sector] in relation to safety and stability”, and a literature review by
Millar (2012) reports that impact assessments and analyses “refute that the proposed EU FTT will effectively
address key policy objectives regarding systemic risk”.

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A number of academics also challenge claims that the European FTT has the potential to reduce the likelihood
of financial crises:


Vella (2012) states that “we should be clear that the FTT does not address any of the recognised causes of
the recent crisis, such as over-leverage and insufficient liquidity provisioning”. He argues that these can be
addressed through other taxes, including bank levies. He adds that “the FTT purports to contribute to the
prevention of future crises not by dealing with the recognised causes of the recent crisis but by dealing
with practices which are not known to increase the risk of crises”.



Anthony et al. (2012) argues that the EU FTT does not reduce systemic risk and/or the likelihood of
financial crises. He explains that historical financial crises have been associated with collapsing real-estate
bubbles and therefore, since real estate is not widely traded, any mispricing in this market is unlikely to
respond to a transactions tax.



Matheson (2011) believes that a transaction tax is an inefficient instrument for preventing bubbles and
regulating financial markets. He states that “current economic thought attributes bubbles to excessive
leverage, not excessive transactions per se”.



Honohan and Yoder (2010) claim that a transactions tax would do little to discourage the activities of the
market in securitised sub-prime mortgages, the credit default swap market or other derivatives-based
markets whose malfunction is thought to have contributed to the recent financial crisis.

Furthermore, a lack of direct supporting evidence for stabilising (volatility-reducing) properties of Tobin-style
transaction taxes is acknowledged even by supporters of the FTT. Pollin (2010) reports that the impact of FTTs
on volatility is ambiguous and Schulmeister et al. (2008) report that ten studies report a positive relationship
between transaction taxes and short-term price volatility and five studies do not find any significant
relationship. In its most recent impact assessment, the EC notes:
“Many studies show that a FTT could aggravate volatility (because of a reduction in the number of
transactions), creating more room for speculators. An extensive review of the economic literature
overall concludes that the effects of the FTT on volatility is largely inconclusive and depends on
market structure”
The EC’s overall position, that the effects on volatility are largely inconclusive and market-specific, can be
illustrated using the work of Pellizzari and Westerhoff (2009), Westerhoff and Dieci (2006), Becchetti et al.
(2013) and Mannaro et al. (2008). Pellizzari and Westerhoff find that the tax can reduce liquidity in stock
exchanges and in turn increase volatility. Westerhoff, however, reaches the apparently opposing conclusion
when working with Dieci that the tax can reduce volatility by producing a reduction in ‘noise trading’. Becchetti
et al. (2013), in a study of the implementation of the French FTT, support Westerhoff’s findings in that intraday
volatility was reduced with insignificant impacts on liquidity. Meanwhile, Mannaro et al. (2006) find that FTTs
reduce liquidity and increase volatility.
The lack of a clear relationship is echoed by the works of McCulloch and Pacillo (2011) and more specifically in
Capelle-Blanchard and Havrylchyk’s (2013) investigation of the impacts of the implementation of the French
FTT. These authors conclude that a FTT would be unlikely to stabilise financial markets but, if appropriately
designed, would be unlikely to destabilise them either. Similarly, von Weizsäcker and Darvas (2010) suggest a
FTT with a sufficiently low rate of tax could partially address socially undesirable transactions with limited
impact on marginally socially desirable transactions, however other policy measures may prove to be better
remedies to achieve financial stability.
Given the undecided nature of the literature on the volatility-reducing properties of FTTs, Erturk’s (2006) point
regarding this issue becomes particularly salient with respect to the EC’s proposal:
“If the Tobin Tax is not stabilising, then much of the rest of the discussion on its feasibility and other
related issues are probably moot.”

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A4.5 The extraterritorial impact
The proposed FTT could significantly increase the cost of funding outside of the EU-11. For example, London
Economics predicts that corporate issuers in non-participating Member States may experience increases in the
cost of funding that could push the effective tax rate up to 100 basis points, rather than 10 basis points currently
commonly encountered (London Economics, 2013).
It is also claimed that the negative impact on returns for corporate bonds on a per transaction basis would be
larger for non-participating Member States than participating Member States. London Economics (2013)
predicts that the impact of the FTT would be at least 10 basis points larger for non-participating Member States
than participating Member States as a proportion of returns, per transaction.
Furthermore, it is claimed that the increase in the cost of funds on a per transaction basis would be significantly
higher for non-participating Member States than participating Member States. London Economics (2013)
predicts that the increase in the cost of funds for non-financial corporations would be approximately five times
larger for non-participating Member States than participating Member States. This is because debt securities
represent a greater proportion of corporations’ capital structure in non-participating Member States than in
participating Member States: debt securities have a share of 54.9% of total funds in non-participating Member
States, compared to 11.3% in participating Member States.
Vella (2013), in oral evidence to the House of Lords, states that the tax could create a distortion for competition:
“It is fairly clear that the introduction of the FTT will introduce new distortions of competition. Just to
give you one example, if a German bank is competing with a UK bank for business with a UK
customer, after the introduction of the FTT the German bank will be subject to the tax while the UK
bank will not, so the German bank will be at a competitive disadvantage as a result of this tax”
The House of Lords EU Committee (2013) itself concludes that non-participating countries in the EU may be
more likely to pay the tax than countries outside the EU because of the imposition of joint and several liability
and the EU regime for mutual assistance on tax matters. This, the Committee suggests, would undermine the
EC’s argument that there would be no difference in the effect of the tax on London as compared to New York
and Hong Kong.

A4.6 Impact on the location of financial activity
The EC (2013b) believes that the issuance principle will discourage relocation of financial activity. It forecasts
that the issuance principle alone will make another 10% of financial transactions 10 subject to the FTT and yield
revenues of €1.22bn.
In addition, it is argued that high-frequency traders cannot move offshore because their computer servers must
be located as close as possible to the servers of the exchanges (Schulmeister, 2012).
To curb the migration of trading, Schulmeister (2012) proposes the introduction of a FTT substitute levy
(FFTSL) in FTT countries. This tax could be charged on transfers of funds from bank accounts in FTT countries
to brokerage firms or hedge funds in non-FTT countries. To be effective in discouraging relocation the FTTSL
would need to be applied at a much higher rate than the FTT: Schulmeister suggests that, for a FTT of 0.05%,
the FTTSL could be 2% or even higher.
However, others believe that relocation will still occur. For example, Poncelet (2013) states:
“The impact of the EU Commission model would be particularly severe due to both the risk of
relocation of financial services outside the FTT zone and importantly to the risk of capital flight to
countries outside the FTT zone”

10

in shares and debt securities issued by EU-11 entities

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Poncelet’s views are echoed by IBFed (2013), which states:
“Those outside the FTT jurisdictions will seek to minimise their financial transactions and
engagement with financial institutions which give rise to the FTT, and will also attempt to protect
themselves from costly compliance whenever possible ... since capital is highly mobile, we expect
financial instruments issued in FTT jurisdictions, including government debt securities, to be quickly
and negatively impacted as the tax gets factored in to the purchase decision”
Additionally, Oliver Wyman (2013) report that due to the impact of the FTT on corporate risk management
capabilities, a number of EU-11 corporates are considering relocating group treasury functions outside the EU11 in order to mitigate the impacts of the FTT.
Comotto (2013) claims that the difficulty of raising working and investment capital would result in EU-11
corporates and financial institutions experiencing a competitive disadvantage, and that the EU-11 would suffer
from the relocation of many financial services “which is not as difficult as DG Tax seems to believe”.

A4.7 Summary
The literature generated to date on the EC’s proposal points to several areas of discussion surrounding the
potential wider impacts of the implementation of the FTT.
Many sources in the literature suggest that the EC’s attempt at insulating business and households from the
effects of the FTT will not be successful. Indeed, analysis by EFAMA (2013) predicts that savers and pensioners
will bear a significant cost of the FTT. By analogy, there could be a comparable impact on companies and other
businesses outside the FS sector.
There is consensus in the literature on the direction of the FTT’s impact on GDP in the EU-11 but there is
disagreement over the scale of the impact. It is anticipated that the impact on GDP will be negative, but the
extent to which behavioural reactions and the cascade effect will generate a more severe economic reaction is
highly contested.
The literature also presents a mixed view of the impact of the FTT on the financial markets, both within and
outside the EU-11. It is debated in the literature whether the EC’s proposal will contribute to or in fact weaken
the stability of the financial markets. The FTT could also result in extraterritorial effects, such as by significantly
increasing the cost of funding in non-participating states. Additionally, there are arguments for and against the
claims that the FTT will influence the location of financial activity.

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Annex 5 – Lessons from national
FTTs
A5.1 Swedish FTT
A5.1.1 Overview
The key attributes of the Swedish FTT are as follows:
Duration

January 1984 – December 1991

Scope

equity (registered in Sweden)
equity options
fixed income (including sovereign debt) 11
related derivatives (e.g. interest-rate futures, options)12

Rates

1% for equity (initially 0.5%)
0.002%-0.015% for fixed income (depending on
maturity)

Key exemptions

conversion of warrants to equity
transfers of Swedish registered equity where no
consideration is given
Swedish debentures
forward rate agreements
variable-rate notes
prior to 1987, intermediate transactions (e.g. use of
brokerage services or interdealer trades)

11

implemented as a turnover tax rather than a transaction tax

12

ibid.

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A5.1.2 Experiences of implementation
The Swedish FTT raised only 3% of the revenue expected. The Swedish government expected to raise SEK
1,500m per year but it only raised SEK 50m per year (Campbell and Froot, 1993).
Trading volumes sharply declined as a result of the Swedish FTT. There was a 98% reduction in futures trading
and the options market “disappeared” (Wrobel, 1996). Bonds trading fell by 85% and bills trading by 20%
(Campbell and Froot, 1993). Equity trading by domestic investors also fell (Wrobel, 1996).
There were also several wider impacts of the Swedish FTT. More than 50% of equity trading moved to London
(Wrobel, 1996) and Swedish share prices fell by 3.2% - 8.5% (Wrobel, 1996), which consequently negatively
impacted capital gains tax revenues (EC, 2011b). Market participants quickly switched from fixed income to
alternative financial instruments which were not subject to the tax (Campbell and Froot, 1993).
As a result of the problematic experiences of implementation and administration, the tax was abolished in
December 1991 following a halving of the rates of tax in January (EC, 2011b). The example of the Swedish FTT
also highlights the potential pitfalls of unilateral implementation of FTTs (EC, 2011b).

A5.2 Japanese FTT
A5.2.1 Overview
The key attributes of the Japanese FTT are as follows:
Duration

1953 - 1999

Scope

equity
corporate bonds
debentures
futures

Rates

0.12 - 0.3% for equity
0.01 - 0.03% for bonds
0.06 - 0.16% for debentures
0.002 - 0.005% for futures

Key exemptions

gift of securities
transfer of securities when setting up or terminating of
trust
transfer of bonds made within a year from the issuing
date
redeemable government bonds

The revenue raised by the Japanese FTT was significant. For example, in the late 1980s, revenue was US $12
billion per year (Singh, 2004) or over 4% of total government revenue (Japan Securities Research, 1992). At the

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height of the Japanese stock market bubble, revenue from the FTT reached a historical high of 0.55% of GDP
(Matheson, 2011).
As part of a package of financial market deregulation the rate of tax was subject to a series of reductions from
1989 onwards (Culp, 2010) and was eventually abolished in 1999 in order to reduce transactions costs and
stimulate market activity (Kawakami, 2002).
The impacts of the Japanese FTT are difficult to observe from the body of literature that has been amassed on
the experiences of its implementation. In a study of the effects of a rate reduction in 1989 on equities listed on
the Tokyo Stock Exchange Liu (2007) finds “significant decreases in estimates of the first-order
autocorrelation in returns of Japanese stocks listed in Japan”. This finding suggests that the Japanese FTT
impeded the price discovery process, creating inefficiencies in the Japanese equity market (Liu, 2007; CME
group, 2010; Matheson, 2011).
The reported benefits of abolition include; (a) “expected to contribute to the globalisation of the yen” (Ministry
of Foreign Affairs of Japan, 1999); (b) made the securities market “easier to use” (Ministry of Foreign Affairs of
Japan, 1999); (c) “reduced security transaction costs” (Kawakami, 2002), and; (d) contributed to the “big bang”
liberalisation of the financial sector (Singh, 2004).

A5.3 UK stamp duty
A5.3.1 Overview
The key attributes of the UK’s stamp duty are as follows:
Duration

currently implemented

Scope

equities registered in the UK
options and rights
convertible and profit-linked debt securities

Rates

0.5%

Key exemptions

primary market transactions
transfers of UK registered equity where no chargeable
consideration is given
transactions executed by a registered intermediary on a
UK-recognised exchange
temporary transfers of securities (including repo
transactions)
UK sovereign debt
non-convertible debt securities
debt securities not linked to profit
reliefs available for certain types of chargeable
transactions conducted by UK resident corporations

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UK stamp duty raised £2.3 billion in 2012-13 (OBR, 2013), which represented approximately 0.41% of total tax
revenues for the period.
A letter to the G20 Finance Ministers by ‘1,000 economists’ (2011) states that the UK stamp duty does not
“unduly impact” on the competitiveness of the City of London.
However, although stamp duty is levied on the purchaser of UK registered equities and is therefore a direct
impact on consumers, purchasers do not necessarily bear the incidence of the tax (Bond et al., 2004).
In addition, there is some evidence to suggest that stamp duty has had a significant impact on the UK’s FS
sector and wider economy. Oxera (2007) states:


that stamp duty creates a significant cost to savers and pensioners, reducing fund sizes of average
occupational pensions at retirement by an estimated £6,441 to £11,538 (in 2006 money);



that its abolition would benefit the wider economy, increasing GDP by 0.24%-0.78% and increasing UK
Government revenues by £1.3-4 billion.

Oxera (2007) find anecdotal evidence to suggest that stamp duty has affected investor preferences for direct
equity investment, suggesting that market participants may prefer to use equity derivatives, such as contracts
for differences (CFD) that are not subject to the tax. However, the effect of stamp duty on trading volumes of
UK equities is ambiguous, which may be a result of the fact that investors have become ‘conditioned’ to its
collection due to its longstanding implementation.

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A5.4 US FTT
A5.4.1 Overview
The key attributes of the US’ FTT are as follows:
Duration

1914 - 196613

Scope

equity
equity in mutual funds
bonds
certificates of indebtedness
rights to acquire these interests

Rates

varied over time but, for example, from 1960 to 1966
they were:
0.1% when equity was issued
0.04% when equity was transferred
0.11% when bonds were issued
0.05% when bonds were transferred

Key exemptions

state and federal obligations
foreign equity exchanged in the US
US equity transferred entirely outside the US
transfers occurring in corporate mergers and
consolidations (not issue of new equity)

The revenue raised by the US FTT was high. For example, in 1965 the revenue from securities transfers alone
was approximately $195 million (in 1965 dollars) (Summers and Summers, 1989).
The wider impacts of the US FTT do not feature prominently in the small body of literature on this example of a
national FTT. Although the reasons for the shortage of evidence in the literature are unclear, it may be in part
due to abolition of the FTT before decimalisation, automation and deregulation of US financial markets, which
could have made the wider impacts difficult to observe empirically.
Nevertheless, the tax was abolished in 1966, although as part of a wider package of legislation in 1965 repealing
almost all federal retail and manufacturing excise taxes (Summers and Summers, 1989).

13

except from a brief period from 1916-1917

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A5.5 French FTT
A5.5.1 Overview
The key attributes of the French FTT are as follows 14:
Duration

August 2012 – present

Scope

equity issued by French firms with market cap > €1bn
high frequency15 order cancellations or modifications
CDS derived from EU sovereign debt

Rates

0.2% f0r equity
0.01% for high frequency16 cancellations/modifications
0.01% for CDS derived from EU sovereign debt

Key exemptions

primary market transactions
central securities depositories
transactions for the purposes of market making
transactions executed under liquidity agreements
intra-group transactions
temporary transfers of securities (including repo
transactions)
acquisition of securities under employee savings regimes
acquisition of convertible or exchangeable bonds

The French FTT is raising less revenue than expected. For example, the French government forecasted that it
would raise € 530 million from the tax from August to November 2012 but it only raised € 200 million
(International Tax Review, 2013; Crouzel, 2013).
Evidence of the impact on volatility is mixed. Becchetti et al. (2013) concludes that the French FTT has reduced
intraday volatility. However, Credit Suisse (2013) reports that it may have led to more volatility on the effective
date of index changes, especially towards the close, although it notes that its sample size is small.

this summarises more detailed descriptions of the attributes of the French FTT, presented in Amafi (2012)
and Blanluet and Boynes (2012)
14

15

applies when cancellations/modifications exceed a certain threshold of orders submitted

16

ibid.

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The evidence on the volume of trading is also mixed, as outlined below.
On the one hand, TABB Group (2013) reports that the French FTT had a only a “limited impact” on equity
trading volume, stating that French equity turnover as a percentage of market share fell from 17.3% in 2011 to
15.3% in 2012. This finding is echoed by Credit Suisse (2013), which reports that there was an immediate
decline in August 2012 but that this was followed by a sharp recovery in September 2012 (although 40% of the
recovery centred on just 5 French stocks).
On the other hand, as shown in the table below, CEPII (2013) finds that equities eligible for the French FTT
(those of companies registered in France and with a market capitalisation in excess of €1 billion) experienced a
larger fall in trading volume than equities of other similar companies. This conclusion is echoed by Becchetti et
al. (2013), who find that the tax led to a significant reduction in trading volumes, and Alcaraz and Maujean
(2013), who report that French equity trading declined by 15% more than other European equity trading by
September 2013 according to calculations by NYSE Euronext.

Table 3: Comparing the percentage change in trading volume for equity subject to the
French FTT and other equity (February 2012 – January 2013)
Change in trade volume,
Feb 2012 – Jan 2013

Euronext 100

Next 150

French, market cap > €1bn

-20%

-30%

French, market cap < €1bn

-

-20%

Not French

-10%

-10%

Source: CEPII (2013)

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A5.6 Hungarian FTT
A5.6.1 Overview
The key attributes of the Hungarian FTT are as follows:
Duration

January 2013 – present

Scope

bank transfers
payments
direct debits
deposits
withdrawals

Rates

0.3% for all transactions except cash withdrawals
0.6% for cash withdrawals
cap of HUF 6,000 (≈ €20) applies to all transactions
under the scope of the tax except for withdrawals

Key exemptions

transfers between accounts held at the same bank by the
same person
cash pooling in bank account held by the corporations in
the same financial institution
transactions between the current account and the
investment account held by the same individual in the
same institution

The Hungarian FTT is currently raising less revenue than expected. For example, the Hungarian government
forecasted that it would raise HUF 82 billion from the tax in the first four months of 2013 but it only raised
HUF 38.8 billion (Hungarian Ministry for National Economy, 2013a and 2013b). A one-off FTT was introduced
in 2013 to raise additional revenue in light of the shortfall between forecast revenue and actual revenue for the
first four months of 2013 (Fitch Ratings, 2013). The rate of this additional FTT was set at 208% of the FTT paid
by banks during January-April 2013 (Fitch Ratings, 2013).
Evidence on other effects of the Hungarian FTT is currently scarce. However, the Hungarian Minister for
National Economy is reported17 to have said:
“market players had reacted rather swiftly to the new levy and they rationalised their transactions”
There is also anecdotal evidence that companies have relocated some of their financial activity overseas.

17

See Portfolio.hu (2013)

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A5.7 Italian FTT
A5.7.1 Overview
The key attributes of the Italian FTT are as follows:
Duration

March 2013 – present

Scope

equity (issued in Italy)
from March 1st 2013, high frequency trading (HFT18) on
equity (issued in Italy)
from September 1st 2013, derivatives and HFT of
derivatives

Rates

0.1% for equity traded on exchanges (0.12% prior to
January 1st 2014)
0.2% for equity traded OTC (0.22% prior to January 1st
2014)
0.02% for HFT (effective September 1st 2013)
lump sum on equity derivatives linked to type of contact
and notional value (effective September 1st 2013)

Key exemptions

transactions with ‘institutional’ counterparties
transactions for the purposes of market making
transactions executed under liquidity contracts
pension funds or compulsory social security institutions
established in EU or EEA Member States

Although the first payment deadline was October 16th 2013, it is currently too early to say how much revenue
the Italian FTT is raising. This is partly because the Italian authorities have not yet made an announcement on
the amount raised, and partly because some companies have experienced delays in establishing systems and
procedures for making the FTT payments.
However, as outlined below, there are early indications that the Italian FTT has led to a decline in trading
volumes.
The TABB Group (2013) claims the impact of the Italian FTT has been more severe than for the French FTT due
to the wider scope of the tax. It states that, according to Thomson Reuters, Italian average daily turnover fell by
38% between the start of 2013 and 12th March 2013, whereas across Europe it rose by 2.64% over the same
period. However, when interpreting these findings it must be borne in mind that during this period Italy was

2013 Stability Law defines HFT as electronically sending, cancelling or modifying orders that exceeds a
threshold determined by a decree of the Ministry of Economy and Finance.
18

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experiencing a significant political transition, which could have influenced investment decisions in the Italian
financial markets.
Analysing data from Borsa Italiana, the Italian stock exchange, also suggests that trading volumes have fallen.
As shown in the table below, average daily equity trading volumes fell by 8% between February 2013 and March
2013, whereas in the previous year they fell by 3% over the same period. Furthermore, between January 2013
and April 2013 a fall of 16% was observed, compared to a 9% rise over the same period in the previous year.

Table 4: Comparing the percentage change in trading volume for equity subject to the
Italian FTT and other equity (February 2012 – January 2013)
Change in average daily
equity trading volumes

February to March

January to April

2013

-8%

-16%

2012

-3%

9%

Source: Borsa Italiana (2012-2013), Di Vittorio (2013), Zacaner (2013)

A5.8 Summary
This annex has shown that a number of countries are currently implementing FTTs or have implemented them
in the past, with varying experiences across the nations considered. This is by no means a comprehensive
examination of all historical and contemporary FTTs, but is has illustrated that several countries have collected
significantly less revenue than initially expected, which has been generally linked to a considerable fall in
trading volume. Of the countries considered, the most adverse experience of implementing a FTT appears to be
Sweden, where only 3% of expected revenue was generated (Campbell and Froot, 1993), with trading volumes
of futures falling by 98% and bonds by 85% (Wrobel, 1996). The UK’s experience with stamp duty has been less
problematic despite an Oxera study (2007) estimating that stamp duty causes a GDP loss of between 0.24% 0.78% per year, however it may influence investor preference for direct equity investments.
Though the causes of the heterogeneity in the nature and magnitude of the economic impacts have yet to be
established empirically, it is clear to see that the imposition of a FTT creates significant implications for the
economy of an implementing jurisdiction. Indeed, drawing from the experiences of historical and contemporary
national FTTs, it can be seen that the EC’s proposal has the potential to generate economic impacts that deviate
considerably from those predicted in the impact assessments. However, as the discussion in previous annexes
has shown, the likely direction of deviation has been the subject of considerable debate.

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Annex 6 – Bibliography
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Oxford University Press: 197 – 215
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proposed financial transaction tax’
Alcarez, M. and Maujean, G. (2012) ‘Les volumes à Paris déjà affectés par la taxe sur les transactions’, Les
Echos, 27 September
Amafi (2012) Financial Transaction Tax (FTT): Assessment of the mechanism in the 2012 Supplementary
Budget Act, Paris: Association française des marchés financiers
Anthony, J.; Biljlsma, M.; Elbourne, A.; Lever, M. and Zwart, G. (2012) Financial transaction tax: review and
assessment, CPB Discussion Paper 202, The Hague: CPB Netherlands Bureau for Economic Policy Analysis
Baltagi, B.; Li, D. and Li, Q. (2006) ‘Transaction Tax and Stock Market Behavior: Evidence from an Emerging
Market’, Empirical Economics 31.2: 393–498
Bank of America Merrill Lynch (2013) Market Structure and Regulatory Change, Charlotte: Bank of America
Barker, A. (2013) ‘Europe financial transaction tax hits legal wall’, Financial Times, 10 September
Becchetti, L.; Ferrari, M. and Trenta, U. (2013) The impact of the French Tobin tax, CEIS Research Paper 266,
Rome: Centre for Economic and International Studies
Bierbrauer, F. (2013) Financial Transaction Taxes and Financial Stability, working paper, 2 July
Biljlsma, M.; Lever, M.; Anthony, J. and Zwart, G. (2011) An evaluation of the financial transaction tax, CPB
Background Paper, The Hague: CPB Netherlands Bureau for Economic Policy Analysis
Blanluet, G. and de Boynes, N. (2012) ‘Premières réflexions autour de la taxe sur les transactions financiers’,
Bulletin Joly Bourse 2013.10: 444
Blundell-Wignall, A. and Atkinson, P. (2011) ‘Global SIFIs, Derivatives and Financial Stability’, Financial
Market Trends, Paris: Organisation for Economic Co-Operation and Development: 2011.1
Bond, S., Hawkins, M. and Klemm, A. (2004) Stamp Duty on Shares and its Effect on Share Prices, Institute
for Fiscal Studies: WP04/11
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Buckley (2012), part of Schäfer et al. (2012) ‘The financial transaction tax: Boon or bane?’, Intereconomics
47.2: 76-103
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—— (2013) Financial Transactions Tax Proposals remain a Threat to Growth and Jobs, Brussels:
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Campbell, J.Y. and Froot, K.A. (1993) ‘International Experience with Securities Transaction Taxes’, in J.
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Economic and Policy Research
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du CEPII 311, Paris: Centre d'Etudes Prospectives et d'Informations Internationales
CME Group (2010) Impact of Tobin Taxes, Chicago: CME Group
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market and its consequences for the financial markets and the real economy, prepared for the International
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Credit Suisse (2012) Europe’s Dalliance with FTTs, Zurich: Credit Suisse
—— (2013) Impact of French Financial Transaction Tax, Zurich: Credit Suisse
Crouzel, C. (2013) ‘La recette décevante de la taxe Tobin’, Le Figaro, 3 March
Culp, C. L. (2010) ‘Financial transaction taxes: benefits and costs’, Compass Lexecon
de la Feria, R. and Lockwood, B. (2010) ‘Opting for opt-in? An evaluation of the European Commission’s
Proposals for reforming VAT on Financial Services’, Fiscal Studies, 31(2): 171-202
Di Vittorio (2013) “La Tobin tax manca il gettito”, ItaliaOggi, 26 April
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Auswirkungen auf private Haushalte und Unternehmen in Deutschland, Frankfurt am Main: Deutsches
Aktieninstitut & Oliver Wyman
EBF (2012), Re: EBF report on the proposed FTT directive, Brussels: European Banking Federation.
EFAMA (2011) ‘EFAMA’s comments on the Commission’s proposal for a Council Directive on a common
system of financial transaction tax’
EFAMA (2013) ‘Potential Impact of the new version of the FTT on the UCITS Industry’, Brussels: European
Fund and Asset Management Association

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Englisch, J.; Vella, J. and Yevgenyeva, A. (2013 ) ‘The Financial Transaction Tax Proposal Under the Enhanced
Cooperation Procedure: Legal and Practical Considerations’, British Tax Review 2013.2: 223-259
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—— (2013a) 2nd proposal on the financial transaction tax (COM/2013/71), Brussels: Taxation and Customs
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—— (2013b) 2nd impact assessment on the financial transaction tax (SWD/2013/28), Brussels: Taxation and
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—— (2013c) ‘Taxation of the Financial Sector’ (EC website on the FTT), Brussels: Taxation and Customs Union,
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from Corporate Bond and Stock Markets’, Journal of Monetary Economics, Vol. 56, pp. 471-493
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Public Economics, 46.3: 307-328
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Honohan, P. and Yoder, S. (2010) Financial Transactions Tax. Panacea, Threat or Damp Squib?, World Bank
Policy Research Working Paper 5230, Washington DC: The World Bank
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Pacific-Basin Finance Journal
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Budapest: Ministry for National Economy
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Noonan, Pinner: International Banking Federation
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Journal of Financial Services Research 32.3: 161-176

A literature review

PwC  45


London Economics (2013) The Impact of a Financial Transaction Tax on Corporate and Sovereign Debt,
prepared for International Regulatory Strategy Group: London
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Sciences Institute of the Evangelical Church in Germany
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A literature review

PwC  46


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A literature review

PwC  47


Vella, J. (2012), part of Schäfer et al. (2012) ‘The financial transaction tax: Boon or bane?’, Intereconomics
47.2: 76-103
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EU Committee, 19 March
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of Futures Markets, Vol. 17 (7), pp. 757–780
Westerhoff, F. and Dieci, R. (2006) ‘The Effectiveness of Keynes–Tobin Transaction Taxes When
Heterogeneous Agents can Trade in Different Markets: A Behavioural Finance Approach’, Journal of Economic
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volumi dall'estero’, Il Sole 24 Ors, 17 May
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unpublished MS research paper, Greenville: Department of Economics, East Carolina University

A literature review

PwC  48


Annex 7 – List of commissioning
organisations
Financial transaction tax: The impacts and arguments was prepared by PricewaterhouseCoopers LLP
(PwC) and was jointly commissioned by the following European business associations:
Alternative Investment Management
Association (AIMA)

Association des Banques et Banquiers,
Luxembourg (ABBL)

Association of British Insurers (ABI)

Association for Financial Markets in Europe
(AFME)

Association of Foreign Banks (AFB)

The Association of the Luxembourg Fund
Industry (ALFI)

British Bankers' Association (BBA)

CME Group

Confederation of British Industry (CBI)

European Banking Federation (EBF)

FIA European Principal Traders Association
(FIA EPTA)

Futures and Options Association (FOA)

Ibec (formerly the Irish Business and
Employers’ Confederation)

ICE Group, Inc

International Capital Market Association
(ICMA)

International Regulatory Strategy Group (IRSG)

International Securities Lending Association
(ISLA)

International Swaps and Derivatives Association
(ISDA)

Investment Management Association (IMA)

Irish Banking Federation (IBF)

Irish Funds Industry Association (IFIA)

MEFF Exchange / BME Clearing

Mouvement des entreprises de France
(MEDEF)

Paris EUROPLACE

Swedish Securities Dealers Association
(SSDA)

Wealth Management Association (WMA)

Wholesale Markets Brokers’ Association
(WMBA)

A literature review

PwC  49

Terms of reference
PricewaterhouseCoopers LLP (“PwC”) has been commissioned by Futures and Options Association (“FOA”) to produce an
independent literature review of financial transactions taxes (“FTT”). FOA is the principal European association for members
of the futures and options industry.
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the terms of our engagement letter dated 15th August 2013.
Whilst FOA commissioned and financed the work, and commented on our draft reports, the final reports represent the
independent analysis of PwC. We accept no liability (including for negligence) to anyone else in connection with this
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