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21 November 2013

PwC: FTT – The Impacts and Arguments – A Literature Review

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This report, commissioned by the financial industry, offers an impartial view and provides an indication of the expected impact of the FTT across the financial services sector, as well as the spillover effects beyond the EU11 states.

The PwC report was commissioned by 27 trade groups, including the FOA, Paris Europlace, the British Bankers' Association and the Investment Management Association.

The report includes key arguments for and against the EC’s proposal and the experiences of the implementation of several historical and contemporary national FTTs. The report was commissioned by a group of 27 trade associations, financial market organisations and business groups.

The executive summary of the report synthesises the key findings of the literature review in order to serve as a briefing note for policymakers and senior officials, who are being sent the report to assist in their decision making processes as the debate on the introduction of the FTT continues.

Key Findings

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 nine 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 EU11 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 markets as a result of the imposition of an 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 extraterritorial 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 extraterritorial 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 the 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.

Link to full review

Further reporting © Bloomberg

© PricewaterhouseCoopers

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