04 Oct 2011

Will the financial transaction tax (FTT) enhance stability?

Emrah Arbak

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In all likelihood, the European Commission’s proposed tax on financial services, the financial transaction tax (FTT), will raise sizeable tax revenues, which explains its political appeal in the current context. However, the tax fails to address the key factors that contributed to the global financial crisis. In the absence of global or even EU-wide cooperation, many of the transactions subject to a tax will relocate to non-cooperating countries, thereby reducing revenue prospects and the effectiveness of supervision. Moreover, the proposal fails to address the growth of leverage, systemic risks and the moral hazard risks arising from ‘too-big-to-fail’ or ‘too-systemic-to-fail’ institutions. Even if it becomes a reality, the proposal should not undermine the chances of more meaningful tax policy alternatives being implemented in the future.

Author Emrah Arbak is a Researcher at CEPS.