Two-thirds of Europeans might support the idea, but that does not mean it is not controversial. Taxation commissioner Algirdas Šemeta defended the Commission's proposal for an EU-wide tax on financial transaction in front of the EP's economic committee on 20 March 2012. The Commission claims the tax will deter risky trading and ensure the financial sector pays it fair share to get the EU out of the crisis. However, critics fear it could lead to firms taking their trade elsewhere.
The financial transaction tax is sometimes referred to as a Tobin tax, as it is based on an idea by American economist James Tobin. In the 1970s he proposed a levy on currency exchange small enough to not disrupt the economy but sufficient to discourage harmful speculation. Together with the Council, the Parliament will need to approve the Commission proposal before the tax can come into force in the EU.
Why the financial sector is being targeted
Public debt in the EU has surged from below 60% of gross domestic product to 80% due to the financial crisis. Member states had to spend €4.6 trillion to bail out the financial sector. The financial sector also enjoys a tax advantage of about €18 billion per year because there is a value added tax exemption for financial services, according to the European Commission.
The European Commission proposes to have a financial transaction tax in all 27 member states to be levied on all transactions on financial instruments between financial institutions when at least one of the participants to the transaction is located in the EU. Shares and bonds would then be taxed at a rate of 0.1% and derivative contracts at a rate of 0.01%. It is believed that this tax could raise up to €57 billion a year.
The Commission believes that the tax would help to shift some of the cost of the bailouts to support the financial sector away from tax payers to the companies that have benefitted from this support.
In addition it could help to discourage risky trading activities, which is believed to have contributed to the development of the current economic crisis. Together with reducing competitive, the tax could assist in defusing future crises.
The revenue of the tax could be shared between member states and the EU, which could use it as an own resource in order to reduce national contributions to the EU budget.
Opponents of the tax believe it could lead to traders taking their business outside the EU, which would lead to job losses while the tax fails to meet its aims.
The EP's economic and monetary affairs committee will scrutinise the plans before making a recommendation to MEPs, who are expected to vote on the proposal during the June plenary.