Financial transaction tax study: Impact on pension savers and the real economy

Taxes on financial transactions have occasionally been suggested in various forms and received traction after the financial crisis. Two arguments for a Financial Transaction Tax (FTT) have consistently been put forward:

• Raise tax revenue from the financial sector.
• Deter purportedly excessive financial trading to reduce market volatility and prevent the build-up of asset price bubbles.

In this study, Copenhagen Economics to revisit the arguments for an FTT and analyse the impact of an FTT on EU financial markets together with how end-consumers, i.e. households and companies, will be impacted.

Our findings show that significant tax revenue cannot be raised without harming the functioning of financial markets and, ultimately, households and companies. Even if disruption to financial markets is avoided, the actual revenue raised will be small.

Assessing the two main arguments put forward in favour of an FTT, we find that:

• An FTT will not prevent the build-up of asset price bubbles, since such bubbles are the result of asset prices consistently growing out of sync with fundamentals over a prolonged period. This is acknowledged by i.e. IMF and the European Commission.
• Behavioural effects will significantly reduce the projected tax revenue from the implementation of any FTT. The higher transaction costs which an FTT entails reduces the incentive to conduct trades. Trades on very small margins will evaporate, and as market participants try to avoid the tax, it will create leakage effects.

Specifically, we find that the revenue impact of an EU FTT of 0.2% on bonds and equities and 0.02% on derivatives will be reduced by approximately 60% due to behavioural effects.

Finally, we find large real costs for the economy: once an FTT is implemented, the value of traded assets affected by the FTT will decline by some 2.3%, corresponding to EUR 700 bn or 5% of EU GDP, a decrease in asset prices equal to an impact of approximately EUR 1,000-1,500 for every adult EU citizen. In time, the bill will gradually shift towards higher funding costs for companies, governments and mortgage loans. Specifically, we find that an FTT could increase funding costs for companies by 0.6% (0.02%- point),  leading to a decline in GDP in the long-run of 0.2-0.5%.