EU do it: The time is ripe for a financial transaction tax

Published: 12 July 2010 on Euractiv.com as an Op-Ed

As EU citizens lose faith in their leaders' resolve to make the financial sector pay for the damage it has caused, the case for implementing a financial transaction tax (FTT) ''could not be stronger,'' argues ex-investment banker Sony Kapoor, managing director of think-tank Re-Defineand an advisor to several G20 governments and the European Parliament, in an op-ed for EurActiv.

This commentary, sent exclusively to EurActiv by Sony Kapoor, is based on published op-eds in Le Monde, Financial Times Deutschland and De Volksrant.

''Dear Ms. Merkel and Mr. Sarkozy,

While the US has embarked on a significant overhaul of its financial system and China has been growing at a blistering pace, the EU is lagging behind both on financial reform and on kick-starting growth. We have been too busy fighting fires partly of our own making.

A FIT proposal

The world has woken up to an urgent fiscal challenge. Budget cuts will soon start to bite at home in Europe, while funding for international development and tackling climate change has already been cut. Meanwhile, the financial system that got us into this fiscal mess remains largely unreformed, with proposed changes largely neglecting the issue of systemic risks posed by financial markets in favour of ‘quick fix’ changes to the banking system. Even less has been done to align finance with the real economy.

Implementing a series of Financial Instrument Taxes (FITs) offers a highly flexible toolkit to help achieve progress on all three fronts. These are similar to, but broader than, the widely-discussed financial transaction taxes (FTTs), and can be tailored to the idiosyncrasies of particular markets. For example, more liquid markets in stocks, futures and certain derivatives will be taxed on a per transaction basis, whereas illiquid securitized products, mortgages and OTC derivatives would be taxed on issuance.