By Alex Barker in Brussels
Introducing a financial transaction tax across the European Union would wipe out or displace up to 90 per cent of derivatives transactions and hit the bloc?s economic output by almost 1.8 per cent over the long term, according to an official impact assessment.
Jos? Manuel Barroso, European Commission president, will unveil plans on Wednesday for a new tax on all types of financial instruments used by European investors, arguing it is a fair way for taxpayers to claw back the costs of the banking crisis.
However, a draft European Commission impact assessment of the planned levy, seen by the Financial Times, underlines the dangers of driving business away from the EU, raising costs of capital and damaging the economies of the 27 member states.
Mr Barroso is expected to unveil the exact scope and tax rate, which until the very last moment has been a point of contention in the Commission and between France and Germany, themeasure?smain proponents.
European officials argue some ?mitigating effects? in the final tax design will limit the hit on economic output to around 0.5 per cent over the long term, in part because the money collected will be invested in areas to stimulate growth.
But in the official model used by the European Commission, imposing a tax of 0.1 per cent on stocks and bond trades and 0.01 per cent on all derivatives is found to reduce long-run gross domestic product in the EU by 1.76 per cent.
Meanwhile, in this scenario, the tax revenues generated amount to just 0.08 per cent of GDP, or 10bn euros ($13.6bn), meaning the levy will cost significantly more than it raises.
Among the reasons for the sharp hit to economic output are the ?strong risks? of relocation. The European Commission model expects 10 per cent of securities market transactions either to leave the EU or to disappear, while the volume of EU derivatives trades will plummet by 70 to 90 per cent.
?Relocation here reflects both the move of activities elsewhere outside of the taxing jurisdiction and the disappearance of some types of activities,? the study finds. ?Such disappearance could be seen as positive if the activities targeted are considered as harmful. To the extent that high-frequency trading is considered as harmful, one has to bear in mind that it is estimated to be about 40 per cent of transactions.?
Opponents of the measure have seized on the impact report as cast-iron evidence that the tax is costly and likely to drive financial business away from the EU.
?Claiming you can avoid financial institutions relocating, even though you slap a local tax on them, is like claiming you can stop a man from sweating,? said one EU diplomat. Another European official opposed to the tax described it as ?the economic equivalent of machine-gunning yourself in the foot?.
Mr Barroso will make the argument that a tax is justified, in spite of the GDP hit, because of the huge taxpayer contribution to shoring up banking, which has to date come to more than a trillion euros in guarantees. ?It is only normal that the financial sector makes its fair contribution,? a commission official said.
? The Financial Times Limited 2011