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Sustainability-oriented future EU funding: a financial transaction tax

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Abstract

Although responsibility for realizing the Europe 2020 strategy is shared between the EU and its 28 member states, the main criticism of the current EU budget relates to the lack of a link between the budget and the Europe 2020 strategy. Therefore the paper focuses on a new budget design as well as alternative revenue sources. One of the possible candidates is a financial transaction tax (FTT). To research FTT revenue potential, a model based on a remittance system was designed. We analyse full or partial replacement of VAT- and GNI-based own resources by the transfer of tax revenues from a FTT raised on the national level to the EU budget. The research reveals that FTT-based own resource would be able to fully replace GNI-based own resource only for some EU member states; however, VAT-based own resource can be fully replaced by a FTT-based own resource for the entire EU. Further, results also show that from the EU11 (28) perspective, the tax is sufficient to fully replace VAT- or GNI-contributions if levied on the EU11 (28) level (not on the national level) as a direct payment to the EU budget without tracking the source member State.

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Notes

  1. Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain. Hereinafter: EU11.

  2. Flash trading is a modern variant of the illegal practice of front-running, where a broker enters his own order in front of a client to profit at the client’s expense.

  3. It is necessary to highlight that it represents the first application of enhanced cooperation in the area of taxation.

  4. For more details, see next chapter, Table 2.

  5. For more details, see next chapter, Table 2.

  6. Both studies consider elasticity and transaction costs factors and are based on a so-called Tobin tax levied only on the yearly turnover of foreign exchange transactions based on data from the Bank of International Settlements. For more details, see Table 11 in the “Appendix”.

  7. Spahn does not consider the elasticity factor in his estimation, as in previous studies. However, as in previous studies, his estimations are based on a so-called Tobin tax levied only on the yearly turnover of foreign exchange transactions. For more details, see Table 11 in the “Appendix”.

  8. The authors also use a fiscal evasion and fraud component and volume elasticity dependent on the transaction costs as dynamic factors affecting FTT revenues. Moreover, they assume that financial transaction are taxed on both legs of the trade—i.e., on the side of the buyer as well as on the side of the seller. They apply the following formula: \( R = 250 * \tau * V * \left( {1 - ev} \right) * \left( {1 + \frac{2\tau }{k}} \right)^{\varepsilon } \), where R represents the annual revenue, 250 represents the number of business days per year, τ represents the tax rate, V represents the market turnover before tax, ev represents fiscal evasion, k represents pre-tax transaction cost and ε represents volume elasticity. Tax revenues are multiplied by two due to a simultaneous reduction of the bid price and an increase of the ask price in connection with a round trip (in a round trip, a person sells the a taxed financial assets and buys it back a few minutes later; then the tax would be paid twice). For more details, see Table 11 in the “Appendix”.

  9. His estimation is based on a static model using the annual turnover of certain financial transactions without considering any dynamic aspects. For more details, see Table 11 in the “Appendix”.

  10. Contrary to the previous studies, the tax base contains all transactions, such as securities, exchange derivatives and OTC derivatives trades. For more details, see Table 11 in the “Appendix”.

  11. The estimates are based on 2010 data and similar assumptions used by McCulloch and Pacillo (2011), such as transaction costs of 0.06% of transaction volume for equity and bonds, 0.07% for OTC derivatives, 0.03% for exchange derivatives and 0.024% for FX Spot Market, elasticity between − 2 and 2 and the value of evasion between 10 and 90% depending on the financial product. For more details, see Table 11 in the “Appendix”. The European Commission uses modified formulas of Jetin and Denys (2005) and McCulloch and Pacillo (2011) when assuming the annual revenues from a FTT based on the annual transaction volume of taxable transactions without using an average daily market turnover multiplying by 250 of business days per year as in previous studies. The following formulas was used: \( R = \tau * V * E * \left( {1 + \frac{\tau }{c}} \right)^{\varepsilon } \), where R represents the annual revenue, τ represents the tax rate, V represents annual transaction volume, E represents relocation and fiscal evasion, c represents transaction cost in percent of the transaction volume and ε represents tax elasticity (i.e., elasticity altogether with tax rate and transaction cost describes the volume reaction of the market due to an increase in transaction costs).

  12. In comparison with the estimates of the European Commission, they expect FTT revenues to be lower mainly due to the use of another dataset with a different assumption for the elasticity (between − 1.5 and 1.5). Moreover, both GDP of the EU11 and value added of the financial sector of the EU11 before taxation serve as a proxy for the calculation of FTT revenues for the EU11. For more details, see Table 11 in the “Appendix”.

  13. These studies by Naess-Schmidt et al. (2014) and Schäfer (2015) can be considered the most comprehensive, as they address residence and issuance principles. The studies employ a similar approach as the European Commission and also uses various tax rates, similar to Schulmeister and Sokoll (2013). Different evasion and elasticity scenarios, such as moderate evasion of 50%, no evasion and evasion of 15 and 75%, depending on the financial product, and elasticities of − 2, − 1.5 and − 1, are used. For more details, see Table 11 in the “Appendix”.

  14. In France, the tax was introduced in August 2012 and consists of three main elements. The first element is a tax on transactions with shares of French listed companies with registered offices in France (only companies with market capitalization higher than EUR 1 bn. are liable for taxation) independent of the place where they are traded. Currently, the tax rate amounts to 0.2% (0.1 initially). The second element is a tax on uncovered credit default swaps issued by the governments of EU member states purchased on the French market. The tax rate is set at 0.01%. The third element is a tax on cancelled orders of 0.01%; this type of tax is intended to discourage traders from high-frequency trading and is levied on all participants in the French market. In practice it applies to cases in which trading is performed through a high frequency algorithm and the ratio of cancelled orders exceed 80%.

  15. Italy introduced its national FTT in March 2013. The Italian system is also based on the taxation of three types of transactions. First, all shares and other instruments of the financial market issued by the companies residing in Italy are taxed (there are some subjects and transactions exempted from taxation). The tax rate is set on 0.1% on transactions taking place on regulated markets and multilateral trading facilities, and 0.2% on other transactions. Second, a tax is levied on derivatives (since July 2013). The tax is levied as a fixed amount according to the type of instrument and the value of the underlying contract. Finally, like France also Italy levies a tax on the value of cancelled orders to discourage traders from high frequency trading. The tax is levied if the ratio of cancelled or modified orders exceeds 60% in one trading day. The tax rate is set at 0.02%.

  16. Austria, Denmark, Germany, Netherlands, Spain and Sweden.

  17. In Sweden, due to the introduction of a 0.002–0.003% security transaction tax on bonds and bond trading, trading volume fell by about 85% during the first week of the imposition of the tax. Trading in futures on bonds and bills fell by about 98% over the same period. Moreover, trade in options essentially disappeared.

  18. The authors assume that both legs of any transaction are in principle taxable (meaning that both parties to the transaction will be taxed according to the net turnover). Therefore, the transaction volume (V) is multiplied by two.

  19. Therefore, the term in the bracket representing the reaction of the market to the taxation is multiplied by two resulting in a higher effect on the transaction volume reaction of the market.

  20. The European Commission in its impact assessment also uses this formula (2011g).

  21. This means the estimation of FTT revenues for variant A–E (i.e., using the tax rates according to Table 3) and all possible combinations of others variables, such as fiscal evasion and relocation, transaction costs and elasticities.

  22. The results of estimations of FTT revenues presented in the form of first and third quartiles are stated in the “Appendix”.

  23. The results of all three scenarios for each variant (i.e., variant A–E) presented as a range between 25p and 75p are mentioned in the “Appendix”.

  24. According to ESA2010, debt securities are negotiable financial instruments serving as evidence of debt.

  25. According to ESA2010, equity and investment fund shares or units are residual claims on the assets of the institutional units that issued the shares or units.

  26. According to ESA2010, financial derivatives can be categorised by instrument, such as options, forwards and credit derivatives, or by market risk, such as currency swaps, interest rate swaps, etc. The data source also includes OTC derivative trades.

  27. These categories are not considered as financial transactions, and therefore are excluded from the estimation.

  28. The total economy covers all five institutional units defined in note no. 31 below. Further, the total economy is defined in terms of resident units. A unit is a resident of a country when it has a centre of predominant economic interest on the economic territory of that country—that is, when it engages for an extended period (one year or more) in economic activities on this territory.

  29. The rest of the world account covers transactions between resident and non-resident institutional units and the related stocks of assets and liabilities. The account of the rest of the world differs from the accounts of other sectors in that it does not show all the accounting transactions in the rest of the world, but only those that have a counterparty in the domestic economy being measured.

  30. Based on the ESA 2010, financial assets and liabilities as negotiable financial instruments, such as debt securities, equity securities, investment fund shares and financial derivatives, are valued at market value. Financial instruments that are non-negotiable are valued at nominal value (see ESA2010 paragraphs 7.38 and 7.39). The counterpart financial assets and liabilities have the same values in the balance sheet. The values should exclude commissions, fees and taxes. Commissions, fees and taxes are recorded as services provided in carrying out the transactions.

  31. Institutional units are economic entities that are capable of owning goods and assets, incurring liabilities and engaging in economic activities and transactions with other units in their own right. For the purposes of the ESA 2010 system, institutional units are grouped together into five mutually exclusive domestic institutional sectors: (a) non-financial corporations; (b) financial corporations; (c) general government; (d) households; and (e) non-profit institutions serving households.

  32. For better understanding, the tax principles used for combinations of different transactions and parties are presented in Table 12, including an explanation in the “Appendix”.

  33. For more details see Methodology and Table 12 in the “Appendix”.

  34. Further, results in detail of all three scenarios for each variant (i.e., variant A–E) presented as a range between 25p and 75p are mentioned in the “Appendix” (Table 13, 14, 15, 16, 17).

  35. Further, results in detail for all three scenarios for each variant (i.e., variant A–E) presented as a range between 25p and 75p are mentioned in the “Appendix” (Table 18, 19, 20, 21, 22).

  36. Considering variant B (5 percentile), which generates the lowest FTT revenues, and variant D (95 percentile), which generates the highest FTT revenues.

  37. However, the replacement of VAT- and GNI-based own resources by an FTT is considered in more detail using three scenarios (static, max evasion and no evasion) of different tax rates (i.e., variant A–E); details mentioned in the “Appendix” for EU11.

  38. However, the replacement of VAT- and GNI-based own resources by an FTT is considered in more detail using three scenarios (static, max evasion and no evasion) of different tax rates (i.e., variant A–E); details mentioned in the “Appendix” for EU28.

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Acknowledgement

This paper presents the results of research within the cross-disciplinary H2020 EU project FairTax No. 649,439, “Revisioning the ‘Fiscal EU’: Fair, Sustainable, and Coordinated Tax and Social Policies”.

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Authors and Affiliations

  1. Department of Accounting and Taxes, Faculty of Business and Economics, Mendel University, Zemedelska 1, 613 00, Brno, Czech Republic

    Veronika Solilová, Danuše Nerudová & Marian Dobranschi

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  1. Veronika Solilová
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  2. Danuše Nerudová
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  3. Marian Dobranschi
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Correspondence to Veronika Solilová.

Appendices

Appendix

In the first row, we assume that EU11/28 resident conduct trades (a) with resident in EU11/28—in this case, both legs of trade are taxable; and (b) with resident in non FTT country—in this case only one leg of trade is taxable. In the second row, we assume that non-FTT resident conduct trades, where assets or underlying assets of transaction is issued in EU11/28, with (a) resident in EU11/28—in this case, both legs of trade are taxable based on the resident and issuance principles; (b) resident in non FTT country—in this case only one leg of trade is taxable based on the issuance principle. In the third row, we assume that resident in EU11/28 conduct trades, where assets or underlying assets of transaction is issued in EU11/28, with (a) resident in EU11/28—in this case both legs of trade are taxable based on the resident and issuance principles; (b) resident in non FTT country—in this case only one leg of trade is taxable based on the issuance principle (Table 12).

Table 11 Survey of FTT revenues estimates on the EU Level.
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Table 12 Tax principles—residence principle and issuance principle.
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Summary of estimates of FTT revenue for EU11 in details of each variant A to E and scenario

See Tables 13, 14, 15, 16, and 17.

Table 13 EU11—summary of the estimates of the FTT revenue—variant A—dataset Eurostat.
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Table 14 EU11—summary of the estimates of the FTT revenue—variant B—dataset Eurostat.
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Table 15 EU11—summary of the estimates of the FTT revenue—variant C—dataset Eurostat.
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Table 16 EU11—summary of the estimates of the FTT revenue—variant D—dataset Eurostat.
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Table 17 EU11—summary of the estimates of the FTT revenue—variant E—dataset Eurostat.
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Summary of estimates of FTT revenue for EU28 in details of each variant A–E and scenario

See Tables 18, 19, 20, 21, and 22.

Table 18 Summary of the estimates of the FTT revenue—variant A—dataset Eurostat.
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Table 19 Summary of the estimates of the FTT revenue—variant B—dataset Eurostat.
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Table 20 Summary of the estimates of the FTT revenue—variant C—dataset Eurostat.
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Table 21 Summary of the estimates of the FTT revenue—variant D—dataset Eurostat.
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Table 22 Summary of the estimates of the FTT revenue—variant E—dataset Eurostat.
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Summary of FTT revenue potential of EU 11 in case of VAT- and GNI-based own resource replacement in details of different scenario

See Tables 23, and 24.

Table 23 FTT revenue potential of EU11 in case of VAT-based own resource replacement—dataset Eurostat.
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Table 24 FTT revenue potential of EU11 in case of GNI-based own resource replacement—dataset Eurostat.
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Summary of FTT revenue potential of EU28 in case of VAT- and GNI-based own resource replacement in details of different scenario

See Tables 25, and 26.

Table 25 FTT revenue potential of EU28 in case of VAT-based own resource replacement—dataset Eurostat.
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Table 26 FTT revenue potential of EU28 in case of GNI-based own resource replacement—dataset Eurostat.
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Solilová, V., Nerudová, D. & Dobranschi, M. Sustainability-oriented future EU funding: a financial transaction tax. Empirica 44, 687–731 (2017). https://doi.org/10.1007/s10663-017-9391-5

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