Proposed European Union Financial Transaction Tax - Essay Example

Proposed European Union Financial Transaction Tax The European Union pecuniary deal toll refers to a pitch that was the work of the European merger. The scheme recommended the imposing of a fiscal operation duty (FTT) to all the 27 affiliate regions of the body, with full achievement targeted to be in position by the end of the year 2014 (Smith, 2012:67). The imposed tax was set to affect monetary transactions happening between fiscal institutions directly by levying 0.1% on any exchange of stakes and bonds, and 0.01% on all offshoot contracts. Due to its proposed gains, many people have since nicknamed the law as the ‘Robin Hood Tax’. The general population and normal business ventures were to remain unaffected (Vella, Fuest and Tim, 2011). The proposed tax was to be separate from normal bank charge that some regional administrations are in the process of levying on monetary institutions to help in shielding them from the fees of any potential bailouts. Research has revealed that the tax has the potential of gathering about 58 billion Euros per year. However, the member states of the European Union are still undecided on whether to agree to the proposal (Beck, 2011:73). Great Britain is one of the states that are vehemently opposing the discharge of the FTT. The England admin has highlighted numerous reasons sustaining their negative stand on the concern. This figure represented about 37% of the total overseas exchange appeal in the world. In London, the dollar trade is two times as big as in America. In addition, the Euro trade in the city is over twice the amount traded in the whole EU region (Benton 2003:54). The United Kingdom’s fiscal services sector is the leading industry in England, having overtaken the production sector in the 1990s. Evidence of this presents itself in the fact that, in the 2009/2010 financial year, the British government raked in 53.4 billion pounds in tax proceeds from the industry. This amount amounted to 11% of the total collection in the country. This amount is significantly larger than the sum of the country’s annual military budget, and is nearly equivalent to the country’s education budget allocation (Stevis, 2012). The county’s monetary services sector represents about 28% of the country’s entire sum of service-related exports, with the banks leading the charge. Due to its status as the biggest financial force, in consideration with all other European Union members, the country stands to be the biggest loser from the introduction of the FTT tax law (Bijlisma, 2011:485). According to the United Kingdom administration, the imposing of the FTT tax law will greatly affect the overall country’s interest, including destabilizing the economy, and influencing the growth of volatility rates in its markets. In addition, the tax will not bring in any substantial returns. The country has presented to the European Union filed reports detailing the numerous potential damages and adverse effects that the law, if made operational, would inflict on it (The Telegraph, 2012). The government is afraid that the law will discourage derivative trade, increase trading-center volatility, and drastically lessen its markets’ liquidity ratios. In addition, they argue that the tax will lead to higher rates of unemployment, increase the tendency to evade tax among citizens, and greatly deplete the current amount of available tax proceeds (House of Lords.). Research on the potential impacts of the proposed tax has shown that the tax will affect the long-term growth in the EU by 1.75 %. This percentage, when broken down, implies to a cost of about 25.55 billion pounds to the UK economy (Boyle, 2009:342). However, the figure is just an average, and analysts forecast that the total sum could be far much larger, considering the country’s uncommonly outsized fiscal sector. In addition, research on the matter reveals that the tax would influence a fall of derivative transactions amounting to about 90%. The country’s capital city, London, is home to the world’s largest counter derivative trade. The city’s derivative trade represents close to 45% of the world’s interest charges accrued from the overall derivative turnover. Britain, against the suggestions of proponent countries, fears that the tax would result to a sharp rise in market volatility (CBN, 2012:34). The reason behind this stand is that so fat, there is no hard evidence showing that the introduction of the tax will diminish market volatility. The British administration argues that, by adding to the current cost of trade in the market, the market’s major players will grow more reluctant to adapt to new information. In addition, the tax will expose them to potentially brutal fluctuations in the market. Attempts by the academic sector to analyze possible outcomes of the tax have drawn arguable and inconclusive results. The British government fears that the FTT tax will substantially decrease the current state of market liquidity in all of the securities trade sectors (Wagner, Smith, and Rigby, 2012). About 40% of the volume of stakes traded in the London Stock Exchange is dependent on high capacity, low-markup deals. The introduction of the FTT will kill this type of trade. This will result to the markets losing its liquidity potential, and lessen its capability to blend emerging information into asset rates (David, 2012:346). Another cause for concern for the British administration is the projected rise in unemployment rates if the tax is imposed. The reason to this is that, basically, the FTT tax implies less investment, and, in addition, lesser output (Hasselbach, 2012). The British argue that, if the tax is operational by 2014 according to the EU plans, it will substantially influence the slowing down of their fiscal recovery module, and lessen the overall capital investment. EU analysts have already forecast a 4.5% diminution in the current rate of investment. Another point of objection is that, if the tax is made operational only in the EU or G20 regions, local traders will move their operations to other more conducive sites like Hong Kong, Zurich, or Singapore. They fear that the move will influence all types of businesses, including those that only stand to suffer minimally, to migrate to FTT- free zones. This result will detrimentally affect the economic state of Britain (IMF, 2012:23) However, not everything about the FFT tax is detrimental. The economic havoc that has been in the recent days has attracted fervent interest in the inner details of the FFT tax law. Though the imposing of the tax law is facing intense opposition from the general fiscal sector, on the brighter side, it presents very good machinery for collecting revenue returns that has proved very efficient (Ian, 2012). Research conducted on a sample of about 2000 trade quantities revealed that a quota of varying levels of taxes levied on various trading of stakes and other fiscal assets could help rake in over $100 billion dollars in a year Julian (Julian, 2012:134). Analysts arrived at this figure even after considering hefty reductions in transaction quantities. In the United States, significant charges were enacted in many monetary trading centers until recently, when intense political clout from the monetary industry, combined with potential threats from the rising global contests, made many regions to significantly lessen, or altogether remove their levies. Notwithstanding, most taxes are still in operation (King, 2012:357). A major outstanding levy is the 0.5 % stamp tax levied on each transaction in the London Stock Exchange. This particular levy helps in the collection of revenue in excess of 4 billion pounds per year, which is the same as about $ 40 billion dollars in the American economy (The Associated Press, 2012). The United Kingdom should first analyze its tax collection strategy before it completely opposes the FFT tax bill. The United Kingdom currently levies a stamp taxes, and has continually managed to collect a significant amount of cash. This example implies that the FFT tax is realistically accruable (Kirilenko, 2001:342). The United Kingdom Stamp tax is applicable to the trade of stakes for companies that base their incorporation in the country. This happens with no consideration to the actual location where the trade takes place. However, the implementing level of the levy is less than satisfactory in cases where the transactions of shares happen in locations that are not within the country’s jurisdiction (Mahmoud, 2006:264). Nevertheless, the stamp law limits the scope of incentives, which can influence companies to migrate in order to evade the levy. The stamp tax in the United Kingdom shows that a small-sized FTT law will not be out of line with efforts that are usually aimed at sustaining an effervescent stock exchange. In addition, the London Stock Exchange also accrues great benefits that significantly prevail over the potential burden that the tax will inflict. This makes the London Stock Exchange to remain in its position as an ideal venue for collecting and transacting capital and trade stakes (Matheson, 2011:354). The United Kingdom already possesses a perfect example of a tax collecting system. In the country, the broker is accountable for the tax collection (Miller, 2011:278). The administration correctly decided that the merchant was the best-placed individual to implement the payment of the levy. In America, the merchant is also responsible in the collection of even the basic transaction levies that are levied in order to fund the Securities and Exchange Commission, and the Commodities Commission (The Telegraph, 2012). In addition, the United Kingdom tax law challenges the legality of the transaction of a stake if the relevant levy is not applied. The resultant stamp acts as ample evidence of the legality of a particular security transaction. In the country, the stamp is also available through electronic avenues (Mulford, 2002:139). In general, failure to pay the stamp levy renders uncertainty over the true form and identity of ownership. This particular stipulation has greatly discouraged potential investors in attempting to evade the 0.25% charge in order to ensure proper and lawful possession of their investments (Norman, 2012). Usually, imposing of levies leads to financial disfiguring, but with the possible immunity, particularly in instances whereby the activity in which the tax is levied is considered detrimental. Some of these activities include alcohol and smoking. However, though obvious distortion occurs due to monetary levy laws, most of the fiscal activity that suffers usually possesses characters that are akin to gambling (A.P. 2012: 17). As a result, this shows that the taxation will undoubtedly inflict negligible effects on the general security trading activities. According to this point of approach, the FTT tax shows a great potential of increasing the effectiveness and efficiency of the United Kingdom’s fiscal markets, along with those of other countries. This is applicable if the industry will strive to effect efficient measures in the implementation of the law in its intended intermediary use. In addition, the country must ensure that the sector involves a minimum number of workers and utilizing a minimum amount of capital (Stevie, 2012:309). If these actions are stringently followed, the result will be that the collected tax will have done its intended job that was to improve the efficiency standards of operation in the fiscal industry. For example, a direct result of the imposing of the stamp tax in the country was the drastic growth in the security sector (Telegraph, 2012:19). In the period that lasted from 1977 to 2007, the quota of the private sector salaries in the stringently defined securities and investment industry increased from around 0.6% to an excess of 2.3 % (Bijlsma, 2011). All these examples have revealed that taxes possess a realistic fiscal benefit in the drastic growth. Evidence of these gains presents itself in the realized enhancement in the distribution of capital, a fact that has enabled various ventures to access different capital trading centers more easily (Castle, 2011). In addition, this has greatly favored individuals in that they now have a realistic chance of changing their expenditure and saving characteristics according to foreseen and real fluctuations in the fiscal trade. However, this approach, analyzed from a different approach, reveals different and detrimental effects (Fuest, 2011:102). If the realized escalation in the use of available resources is only linked to the increased levels and volumes of trading, and did not directly result to better sharing of capital, then it would seem that the utilization of the resources was an extravagant waste. If a FTT tax levy effectively lessens the quantities of trade, and also directly reduces the size of the resources used by the industry without detrimentally affecting the industry’s capability to effectively share available capital, then the law will effectively be helping the sector become more efficient, and will also avail previously held up resources for other positive uses. This, in itself, is a very good gain from the FTT (Smith, 2012:19). The reason behind this is that, from analysis, if the tax managed to lessen the overall trade quantity by around 25%, this would result into the availing of a large amount of funds amounting to about $ 60 billion dollars a year in terms of savings made in labor and capital, which can be subsequently channeled to other uses (Stevis, 2012). In conclusion, the United Kingdom should strive to change its negative stand on the FTT tax levy. This is because it is obvious that, though it will experience massive short-term losses, the greater good to be gained over the long term will comfortably oblique ant initial negative outcomes. In addition, most of the other countries are already backing the levy, and the United Kingdom stands to suffer greatly if it is left out. Bibliography Beck, T., 2011. The Future of Banking.London: CEPR. Benton, E., 2003. The Future of Banking. Connecticut: Greenwood Publishing Group. Bijlsma, M. et. Al. 2011. An Evaluation of the financial transaction tax. Available from: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CDwQFjAD&url=http%3A%2F%2Fwww.rijksoverheid.nl%2Fbestanden%2Fdocumenten-en-publicaties%2Frapporten%2F2012%2F03%2F21%2Fachtergronddocument-cpb-evaluatie-ftt%2Fachtergronddocument-cpb-evaluatie-ftt.pdf&ei=7G-ET67GMKrE0QWrv-W-Bw&usg=AFQjCNHKdwAoOD2c3rASKxGihLNUGa8RQQ&sig2=wqG5xJJQaeryInj2-fYOYg [Accessed 10 April 2012] Boyle, D., 2009. 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