Debattartikel av Göran Färm införd i Financial World i maj 2012.
In September 2011, the European Commission presented the concept of an EU financial transactions tax (FTT), a co-ordinated framework of nationally based transaction taxes that would raise around €57bn a year. All member states would have to respect a set of guidelines and two minimum rates: 0.01 per cent for derivatives and 0.1 per cent for shares and bonds. The initiative has been intensely debated. While it has gained increasing political support over the past few months, it is still strongly resisted by a number of players – notably the British and Swedish governments.
Many opponents rely on “the Swedish case” for negative evidence. Because an FTT, the argument goes, reduced market volumes and pushed trading away from Sweden in the 1980s, the concept could never work in the EU in the 2010s.
This argument is weak. The Swedish FTT was indeed a failure but the crucial problem was bad tax design, not the taxation concept as such. Using this experience as a pretext for refusing to discuss constructively the Commission’s proposal is not a well-founded approach. The naysayers should be more careful in this regard.
The excessive focus on the Swedish case is also narrow-minded. There is a clear need for naysayers to broaden their perspective. Around the world, there are a number of national FTT models that are at least as relevant as the Swedish system. Hong Kong, India, South Africa, Taiwan and the UK are among the countries that currently run well-functioning FTTs. Not least, British stamp duties should be turned into a more salient point of reference for EU discussion. The UK has for decades been operating a successful system, with solid revenues and limited distortion effects, which it would make sense for the EU to learn from and take inspiration from.
The Swedish FTT was introduced in 1984 and abolished in 1991. Its size and scope were changed on several occasions. Until 1989, it applied primarily to transactions in stocks and stock-based derivatives. From then, transactions in fixed-income securities – primarily bonds and bills – and derivatives based on those securities were included as well.
The driving force behind the tax was the Swedish Trade Union Confederation. In spite of protests from the Finance Ministry and the opposition, the confederation managed to secure support for the tax from the ruling Social Democratic Party. The primary aim in the first phase was to damp the rapid wage increases in the financial sector. Adding fixed-income securities in the second phase was more about trying to curb speculation.
Partly because of the political focus on wages in the financial sector, the tax was levied on Swedish brokerage services. Brokers generally made a lot of money at that time and all transactions of a substantial size carried out in Sweden depended on such services. This meant that the tax did not apply to small transactions where a broker was not involved. It also meant that transactions in Swedish securities via non-Swedish brokers outside of Sweden were not made subject to taxation.
The Swedish FTT had three important flaws. They have all been taken into consideration in drafting the Commission’s proposal.
First, Swedish tax rates were very high. The tax on stock transactions was set at 0.5 per cent (1984-86) and 1 per cent (1986-90), i.e. five to 10 times higher than the 0.1 per cent minimum level advocated by the Commission. The tax rates on derivatives – ranging from 2 per cent (on stock options from 1986) to levels at or below 0.15 per cent (on some derivatives from 1989) – were in general well above the 0.01 per cent Commission minimum. Only the Swedish rates for bonds were fixed at low levels. The most frequently cited negative effect of the tax is the migration of trading in Swedish stocks to London and the collapse of parts of the domestic derivatives market. But one has to bear in mind the high Swedish rates.
Second, the Swedish taxation mechanism was easy to evade. The fact that the FTT was narrowly levied only on Swedish brokerage services meant that foreign market players could easily avoid the tax by moving their trading in Swedish securities to brokers established in London. So they did. Substantial parts of the trading volume in the most actively traded Swedish stock classes moved away from Sweden.
The tax mechanism suggested by the Commission is not that generous. It prefers to apply the FTT to transactions between all financial institutions – with a broad definition of what should be seen as such an institution. It also introduces a residency rule, so that any transaction in the world where a European institution is involved should be subject to taxation in Europe. These two principles should be strong barriers against tax avoidance.
What needs to be further elaborated is how to deal with transactions in European financial instruments between non-European institutions. One way forward could be a broader application of the mechanism used for the British stamp duty, where the taxes are levied on transactions in shares in UK companies no matter who is involved in the transaction or in which country it takes place. There are some minor loopholes but, as a general rule, everyone trading in British stocks has to pay the tax. With such a provision included in the Swedish FTT design, the migration problem could have been efficiently dealt with. Reflecting this thinking, there is now an interesting discussion in the European Parliament on adding a provision to the Commission proposal laying down that all transactions in financial instruments issued in the EU should be taxed there.
Third, the empty spaces in the Swedish FTT scope turned out to be very troublesome. When the tax was extended to fixedincome securities in 1989, only certain parts of the market were included. While government bills and bonds and some associated derivatives were made subject to taxation, excellent substitutes such as debentures, variable-rate notes, forwardrate agreements and swaps were not. This set-up implied that market participants could inexpensively, and without any substantial drawbacks, move from taxed instruments to non-taxed substitutes. So they did. In the first week after the extension, trading in bonds fell by around 85 per cent and trading in futures on bills and bonds by as much as about 98 per cent.
Determined not to repeat such a devastating design error, the Commission advocates a very wide scope. With only a few narrow exemptions, all financial transactions are covered.
These exemptions relate to transactions directly involving private households and small and medium-sized enterprises, spot transactions in the currency exchange market, and the raising of capital by companies and public bodies in primary market operations.
Given these flaws in the Swedish design and the different Commission solutions, the Swedish experience actually does not tell us much about what is to be expected from an FTT in the EU. There are good reasons to believe that it could be much more successful than its Swedish predecessor. Moreover, the Swedish tax was implemented in a tiny fringe market of eight million inhabitants and would be much more potent in the EU market of more than 500 million citizens.
What is now sorely needed is a constructive attitude from all 27 member states. The proposal is a decent startingpoint and should not arbitrarily be brushed away with highly questionable references to historical cases such as the Swedish one. Instead, it is time to get down to pragmatic business. With mutual flexibility from both yeasayers and naysayers, it should be possible to find a compromise that everybody can live with. It would make no sense to create destructive divisions in Europe over this issue.
Göran Färm is a member of the European Parliament and of the Swedish Social Democratic Party. As an MEP, he sits on the Committee on Budgets.