FTT criticised by Dutch economic policy researchers

The European Commission-proposed Financial Transaction Tax could cost investors a lot of money but not reduce the risk of future financial crises, according to research from the CPB Netherlands Bureau for Economic Policy Analysis.

The Bureau’s researchers have looked to answer questions such as whether an FTT could stop the sorts of failures that led to the financial crisis, how well it would succeed in raising revenues, and how it compares to other taxes in terms of efficiency.

Their conclusion on first question is that it would not be effective at all in reducing market failures.

“Taxing of transactions is not well targeted at behaviour that leads to excessive risk and systemic risk creation. The empirical evidence does not suggest that the introduction of an FTT reduces volatility or asset price bubbles. Transaction taxes will likely reduce investment in trading activity and information acquisition, but also raise the costs of insurance against currency and interest risks by companies, insurers and pension funds. The welfare effect of that is unclear.”

Where an FTT may be more successful is in raising revenues, the Bureau states.

“In the short term, the incidence of the tax will be chiefly on the current holders of securities. Ultimately, the tax will be borne in part by end users, and we estimate the likely effects on economic growth. When compared to alternative forms of taxation of the financial sector, the FTT is likely less efficient given the amount of revenues. In particular, taxes that more directly address existing distortions (such as the current VAT exemption for banks, and the bias towards debt financing) provide more efficient alternatives.”

To read the report click here: FTT Evaluation

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