COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
Date: 2011-09-28
Institutions: European Commission
Subjects: anti-crisis plan, economic recession, economic stabilisation, financial aid, financial institution, financial transaction, financing of the EU budget, single market, tax, tax exemption

EUROPEAN COMMISSION 

Brussels, 28.9.2011 
SEC(2011) 1103 final 

COMMISSION STAFF WORKING PAPER 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying the document 

Proposal for a Council Directive 

on a common system of financial transaction tax and amending Directive 2008/7/EC 

{COM(2011) 594} 
{SEC(2011) 1102} 

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Executive Summary of the Impact Assessment Report on 
"Instruments for the Taxation of the Financial Sector" 

1. 

INTRODUCTION  

In its Communication "Taxation of the Financial Sector" of 7 October 2010, the Commission 
announced  the  launch  of  a  comprehensive  Impact  Assessment  (IA)  to  examine  further  the 
options for the taxation of the financial sector to be in a position to make appropriate policy 
proposals.  This  IA  therefore  analyzes  various  tax  schemes  and  specifies  the  appropriate 
design of a FTT and its possible impact.  

2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

As required by the Impact Assessment Guidelines, this Impact Assessment has benefited from 
the consultation of all interested parties. It also benefited from the results of ad hoc external 
studies. 

3. 

PROBLEM DEFINITION AND SUBSIDIARITY 

3.1. 

Problem definition 

Costs of the crisis 

A common claim in public debates is that the financial sector should bear its fair share of the 
costs  of  the  financial  crisis.  Member  States  individually  committed  to  support  the  financial 
sector for a total of about EUR 4.6 trillion (39% of EU-27 GDP in 2009). This has aggravated 
the situation of public finances and such situation is hardly sustainable from a fiscal point of 
view and imposes a heavy burden on the present and future generations. 

VAT exemption of financial services 

Article 135(1) of the VAT Directive provides an exemption from VAT for most financial and 
insurance services. The analysis suggests that the VAT exemption leads to a tax advantage for 
the financial sector in the range of 0.15% of GDP. It results in a preferential treatment of the 
financial sector compared with other sectors of the economy as well as in distortions of prices. 

Market failure and systemic risks in the financial sector 

The  crisis  resulted  from  the  complex  interaction  of  market  failures,  global  financial  and 
monetary imbalances, inappropriate regulation, weak supervision and poor macro-prudential 
oversight.  It  has  been  argued  that  taxes  could  be  used  as  regulatory  tools  to  address  the 
problems such as implicit or explicit guarantees; automated trading (and more generally short-
term  rent-seeking);  different  tax  treatment  of  debt  and  equity;  excessive  remuneration 
schemes that encourage risk-taking; large amounts of complex derivatives, and the existence 
of economic rents, leading principally to wage premiums in the sector. 

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Internal Market Aspects 

In the aftermath of the financial crisis, Member States have reacted by imposing various tax 
and  levies  on  the  financial  sector.  Such  unilateral  action  might  lead  to  relocation  and 
distortions  of  competition  in  the  Single  Market  and  calls  for  more  coordinated  actions. 
Coordination is also warranted because of the risk of double-taxation. 

3.2. 

EU right to act and subsidiarity 

The  right  for  the  EU  to  act  in  relation  to  taxes  on  the  financial  sector  would  be  based  on 
Articles 113 and 115 of the Treaty on the Functioning of the European Union (TFEU). The 
main  rationale  for  the  EU  action  is  that  the  functioning  of  the  Internal  Market  would  be 
hampered if Member States decide to act unilaterally in this field. At least 12 Member States 
have  introduced  or,  are  analysing  the  possibility  of  introducing,  bank  levies  on  financial 
institutions. This uncoordinated introduction of taxes on the financial sector fragments the EU 
financial  market,  distorts  competition  and  increases  the  risks  of  relocation  of  the  financial 
activities  both  within  and  outside  the  EU.  It  would  also  increase  the  risk  that  the  financial 
sector  becomes  subject  to  double  taxation,  which  would  in  turn  hinder  the  exercise  of  the 
fundamental freedoms protected by the TFEU.  

It must therefore be concluded that EU action would respect the subsidiarity principle since 
the policy objectives cannot be sufficiently achieved by actions of the Member States, and can 
be better achieved at EU-level. 

4. 

OBJECTIVES 

The following general objectives can be defined: 

• 

• 

• 

Raising  revenue  and  adequate  contribution  from  the  financial  sector  to  tax 
revenues; 

Limiting undesirable market behaviour and thereby stabilizing markets; 

Ensuring  the  functioning  of  the  Internal  Market  (avoid  double  taxation  and 
distortion of competition). 

General Problems 

Specific problems 

General objectives 

Specific objectives 

Costs  of 
(Fiscal 
issues) 

the 

crisis 
consolidation 

Tax  advantage  for  the 
financial sector 

support 

public 
Substantial 
financial 
and 
other  budgetary  effects  of 
the  financial  crisis  led  to 
need 
budget 
for 
consolidation 

Raising revenue 

Adequate 
substantial) 
from the financial sector 

(fair 
and 
contribution 

VAT-exemption 
financial services 

of 

Identifying 

(1) 
revenue sources 

new 

(2)  Recover  costs  of  the 
recent financial crisis 

(3)  Cover  the  budgetary 
costs  of  potential  future 
financial crises 

(4)  Compensate  for  VAT 
exemption  of 
financial 
services 

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failure 

Market 
systemic  risks 
financial sector 

in 

and 
the 

(1)  Undesirable  market 
behaviour  due  to  implicit 
guarantees (moral hazard) 

(2) Not properly managed 
and  supervised  automated 
trading 

(3)  Distortions  of  debt-
equity choice: Leverage 

(4)  Excessive  executive 
compensation 
schemes 
encourage risk-taking 

(5) Complex products and 
counterparty risk 

Reduce 
excessive 
incentives 

incentives 

for 
risk-taking 

Address 
posed 
trading 

specific 

risks 
automated 

by 

Reduce  leverage  –  debt-
to-equity ratio 

Reducing 
market  behaviour 
thereby 
markets 

undesirable 
and 
stabilizing 

Ensuring  the  functioning 
of  the  Internal  Market  by 
a  coordination  of 
the 
measures to be introduced 

Avoid  distortions  within 
the  EU,  ensure  efficiency 
of 
and 
the  measures 
relative 
safeguard 
competitive 
position 
within the EU 

(6) Economic rents 

Avoid double taxation 

5. 

POLICY OPTIONS 

The  policy  options  analysed  in  the  IA  (Financial  Transactions  Tax  (FTT)  and  a  Financial 
Activities Tax (FAT) areassessed against the baseline scenario.  

The baseline scenario is the scenario without introducing taxes. It is characterised by the VAT 
exemption  of  the  sector  that  emerges  as  the  main  difference  of  tax  treatment  between  the 
financial sector and other sectors of the economy, by high levels of executive compensations 
in  the  financial  sector,  by  recent  unilateral  actions  by  Members  States  to  implement  bank 
levies as well as by a set of national taxes on either the sector or on financial transactions, by 
risks of double-taxation and by many recent initiatives in regulating the sector. 

This  baseline  scenario  also  takes  into  account  certain  regulatory  measures  for  the  financial 
sector,  which  are  currently  being  proposed  and  which  also  pursue  some  of  the  objectives 
defined above. More particularly, the IA assumes the adoption of those regulatory measures 
that are aimed at decreasing the individual as well as the systemic risk in the financial sector 
by  increasing  capitalization  and  capital  buffers  for  both  the  financial  institutions  and  the 
financial  system  as  a  whole.  Some  other  policy  options  such  as  additional  regulation, 
removing the VAT exemption or addressing tax differences for debt and equity by changes in 
the  corporate  tax  systems  are  discarded  on  the  ground  that  they  do  not  address  a  sufficient 
number of the identified problems. 

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6. 

COMPARING POLICY OPTIONS 

6.1. 

Raising  revenue  and  adequate  contribution  from  the  financial  sector  to  tax 
revenues 

Identifying new revenue sources 

Both  tax  instruments  –  FTT  and  FAT  –  could  be  new  revenue  sources  as  they  are  able  to 
generate  significant  amounts  of  tax  revenue  for  public  budgets.  However,  there  is  a  large 
uncertainty  about  the  real  revenue  potential,  given  the  number  of  unknown  variables  and 
assumptions in the estimations.  

For the FAT, the revenues at an illustrative tax rate of 5% range between EUR 9.3 billion and 
EUR 30.3 billion depending on assumptions on relocation and design.  

There  is  greater  revenue  potential  for  the  FTT.  Estimations  may  range  between  EUR  16.4 
billion and EUR 400 billion depending on assumptions on decrease in volume, the scope of 
products covered and the tax rates (0.01% for the first estimate and 0.1% for the second). The 
relocation  assumption  would  cover  migration  of  transactions  and  reduction  of  volume  of 
activity, notably of high speed trading transactions. 

Recover costs of the recent and future financial crises 

Imposing new taxes on the financial sector would contribute to recover the budgetary cost of 
the recent crisis if it is argued that the whole sector indirectly benefited from the financial aids 
granted  to  certain  financial  institutions.  Furthermore,  the  so-called  polluter-pays-principle 
would justify requiring that the financial sector further contributes to the government budget, 
with a view to covering the costs of future crises that go beyond the resolution mechanisms.  

6.2. 

Compensate for VAT exemption of Financial Services 

Although the addition-method FAT would partly address the VAT exemption for the financial 
sector, the IA concludes that this issue should ideally be solved in the context of the Green 
Paper on VAT. 

6.3. 

Correcting  undesirable  market  behaviour  and  thereby  stabilizing  financial 
markets 

Reduce incentives for excessive risk-taking  

Regulatory  measures  more  closely  linked  to  the  sources  of  systemic  risk  might  be  more 
appropriate to deal with excessive risk taking. 

However, the FTT might be an appropriate tool to reduce excessive risk-taking to the extent 
that  short-term  trading  and  highly  leveraged  derivative  trading  creates  systemic  risks.  The 
FAT would only be an indirect measure to tackle risk-taking.  

Address specific risks posed by automated trading 

The FTT, de facto increasing the costs of transactions in financial markets, could be used as a 
measure  to  reduce  Automated  Trading,  and  notably  its  subset  of  High-Frequency-Trading. 

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The  effects  of  additional  transaction  costs  might  be  particularly  strong  on  some  market 
segments characterised by very narrow spreads. 

The FAT does not have a direct impact on the trading behaviour in financial markets. 

Reduce leverage – debt-to-equity ratio 

Neither the FTT nor the FAT address the distortions of financing decisions and the incentives 
to excessive leverage created by the different treatment of debt and equity under the current 
corporate tax systems. Regulatory measures are more appropriate for this purpose. 

Taxing economic rents - Introduce measures to tax value added in the financial sector? 

The FTT would have limited merits as a tax on economic rents. The FAT can be specifically 
designed to tax economic rents, although its effectiveness will depend on the applicability of 
the notion of normal returns to the tax base.  

6.4. 

Ensuring the functioning of the Internal Market  

In  order  to  ensure  the  functioning  of  the  Internal  Market  and  to  minimize  economic 
distortions  within  the  EU,  both  tax  instruments  should  be  ideally  introduced  with  a  high 
degree  of  harmonisation  of  the  tax  bases  and  the  tax  rates.  More  particularly,  both  the  FTT 
and  the  FAT  should  be  introduced  in  a  harmonised  way  to  avoid  double  taxation  or  non-
taxation. 

6.5. 

Cumulative effects 

Although the cumulative effect of the tax with regulatory changes is more easily measurable 
for  the  FAT  than  for  the  FTT,  it  is  likely  that  the  impact  of  both  FTT  and  FAT  on  most 
economic variables (cost of credit, macroeconomic variables and at the sector's level) simply 
adds to the effects of the regulatory measures currently being proposed.  

6.6. 

Overview and concluding remarks 

The analysis showed that both instruments – FTT and FAT – are technically feasible but the 
choice of one over the other is essentially a trade-off among the different objectives pursued 
and would also depend on the specific design features of the tax.  

Both taxes seem to have the potential for raising significant tax revenues from the financial 
sector, although to a potentially greater extent for the FTT. 

The FTT comes with a higher risk of relocation or disappearance of transactions, especially 
with  respect  to  frequent  short-term  transactions.  To  this  extend,  Automated  Trading  in 
financial  markets  could  be  affected  by  a  tax-induced  increase  in  transaction  costs,  so  that 
these costs would significantly erode the marginal profit, thereby affecting the business model 
of high-frequency trading. 

Both taxes are also expected to have small but non-trivial effects on GDP and employment, 
with  the  negative  effects  of  the  FTT  probably  being  somewhat  higher.  The  reason  for  this 
negative effect is the increase in the cost of capital, as the taxed persons will try to pass the 
tax  through  to  their  clients,  and  which  then  negatively  interacts  with  investment.  The 
distributional implications of a tax on the financial sector are typically progressive, i.e. such 

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taxes fall more on the richer parts of society than on its poorer parts, as the first make more 
use and benefit more from the services provided by the financial sector. This holds especially 
for the FTT in case it was limited to transactions with financial instruments such as bonds and 
shares and derivatives thereof. 

On  29th  June  2011,  the  European  Commission  put  forward  a  proposal  for  the  Multiannual 
Financial Framework 2014-2020. In this context, it proposed to introduce a FTT in the EU as 
a first step, taking into account its revenue potential and its impact on excessive specific risk-
taking. The Commission Staff Working Paper1 accompanying the proposal identifies several 
elements  which  need  be  taken  into  consideration  to  mitigate  the  risks  of  relocation  when  a 
FTT would be implemented at EU level, which are discussed in the following section.  

7. 

ANALYSIS OF IMPACTS OF DIFFERENT VARIANTS OF A FTT  

7.1. 

Products and transactions covered 

The  policy  options  distinguish  between  a  tax  on  (i)  currency  spot  and  derivatives 
transactions, a tax on (ii) securities transaction on primary and on secondary markets, 
and a tax on (iii) derivatives markets, excluding derivatives on currency exchanges. All 
markets covered are both regulated exchange markets and trading "over the counter". 

Currency transaction tax (CTT) 

The collection would take place centrally at currency exchange systems, namely in Real Time 
Gross Settlement (RTGS). For transactions which are tracked in such systems, a tax could be 
levied  centrally.  Note  that  this  option  poses  considerable  legal  issues.  We  therefore 
distinguish between spot currency markets and derivative markets for currencies. 

Securities transaction tax (STT) without derivatives and currency transactions 

It corresponds to the narrow-based transaction tax which would tax only the spot transactions 
of equities and bonds (on primary and secondary markets). This option is similar to the UK 
stamp  duty  when  combined  with  the  domestic  issuance  principle.  Alternatively,  one  could 
exclude  primary  markets,  so  as  to  avoid  making  such  capital-raising  more  expensive.  Then 
such a securities transaction tax would only be levied on the trading of shares and bonds on 
secondary markets. 

Financial tax on derivatives 

It  would  cover  all  financial  derivatives  that  are  directly  or  indirectly  derived  from  products 
traded  on  regulated  exchanges  or  traded  over  the  counter.  This  can  include  financial 
derivatives  for  currency  transactions  securities  or  commodity  based  derivatives,  risk  or 
interest rates based or all other financial derivatives that are not outright spot transactions and 
transactions for the raising of capital, such as bonds and shares. 

1 

European Commission. SEC(2011) 876 final, p. 29-30. 

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Financial transaction tax 

This option would cover all financial transactions as outlined above or a subset thereof. Such 
subset could e.g.  exclude taxing outright spot transactions on currency markets and exclude 
taxing the raising of capital through the issuing of bonds or shares. 

Pros and cons of the different options 

The  directive  on  markets  in  financial  instruments  already  contains  a  well-established 
classification  of  financial  instruments  and  products,  which  is  taken  as  a  starting  point  for 
defining the scope of the FTT proposal with respect to products to be covered.  

All products that define financial markets and financial transactions and that could be close 
substitutes should form part of the basket of products covered. Going for narrower definitions 
would invite for large-scale tax-avoidance activities. Thus, an FTT covering all securities and 
all  derivatives  thereof  seems  to  be  the  most  suitable  coverage  of  taxable  products  under  an 
FTT. 

As regards currency transactions, there might be a potential conflict between the objective of 
raising additional revenue and the objective not to impose restrictions to the free movement of 
capital.  This  holds  especially  for  spot  currency  transactions.  Especially  taxing  currency 
transactions  involving  different  EU  currencies  is  typically  assumed  being  in  violation  of 
Article  63  TFEU,  while  taxing  currency  transactions  involving  non-EU  currencies  could 
potentially be made compatible in case the Council decided to do so in applying Article 64.3 
TFEU that enables it. 

7.2. 

Taxable event 

The  taxable  event  could  either  be  based  on  the  accrual  or  on  the  cash  principle.  For  some 
transactions  such  a  distinction  could  be  rather  irrelevant  as  both  occur  at  the  same  time, 
especially  when  transactions  are  carried  out  electronically.  This  is  typically  the  case  in 
financial markets. However, in case one opted for a cash-based approach only, there might be 
an  incentive  for  deferring  payments  so  as  to  benefit  from  substantial  cash-flow  advantages. 
Also  in  cases  where  no  exchange  of  instruments  takes  place,  the  taxable  event  would  still 
occur.  For  derivatives,  the  taxable  event  would  then  typically  be  the  moment  when  the 
contract is agreed upon. The IA suggests that the best option would be a hybrid of the cash 
and accrual based principles, depending on products considered. 

7.3. 

Place of Taxation 

In  order  to  define  the  financial  transactions  that  each  jurisdiction  would  be  entitled  to  tax 
under  the  FTT,  different  principles  could  be  used  (residence  of  the  parties,  place  of  the 
transaction,  and  place  of  issuance  of  the  financial  instrument).  Those  approaches  have 
different  challenges  with  regard  to  tax  collection  mechanisms,  enforcement  and  revenue 
distribution.  The  IA  concludes  that  the  residence  principle  is  suggested  as  the  best  option, 
taking into account the need to mitigate relocation risks and the requirements for a simple tax 
administration scheme. 

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7.4. 

Taxpayer 

Of the various options discussed, the FTT could be levied on the financial institutions being 
party or intervening on behalf of a party. This would have the advantage of targeting the legal 
incidence  on  the  financial  sector  and  of  avoiding  the  problematic  of  potentially  high 
administrative  costs  of  a  FTT  on  non-financial  actors.  In  order  to  catch  also  intra-group 
financing  and  shadow-banking  activities,  it  is  suggested  that  all  the  enterprises  conducting 
more than a certain threshold of financial activities should become subject to the FTT too. 

The IA suggests that the option of making the parties to a transaction established in the EU 
liable to pay the tax due in case they trade with non-EU financial institutions is an appropriate 
way to fight tax avoidance.  

7.5. 

Taxable base 

The  definition  of  the  taxable  base  for  spot  transactions  should  not  pose  serious  problems. 
Although some derivatives do have their own value at the moment of contracting, for many 
the only readily available reference value, which could serve as a taxable base is the value of 
the underlying instrument or asset. The IA suggests using (i) the gross transaction value for 
spot transactions, and (ii) the value of the asset underlying a derivative contract (i.e. notional 
value). 

7.6. 

Tax rate 

A  low  flat  statutory  tax  rate  is  assumed  to  be  essential  to  avoid  strong  negative  impacts  on 
markets  and  to  ensure  some  revenue  collection,  since  the  incentives  for  avoidance  increase 
with the tax rate. The IA also suggests differentiated rate by category of products as a good 
way to mitigate the relocation risks while ensuring appropriate revenues. 

7.7. 

Conclusions on the design 

For an efficient application of any version of an FTT in the EU, a common definition of the 
scope of the tax, tax rates as well as on the precise tax bases and other essential features of the 
tax  is  highly  advisable.  Firstly,  there  are  strong  economic  reasons  for  a  high  degree  of 
harmonisation and co-ordination in order to avoid substitution and loopholes. Secondly, there 
are  technical  arguments.  Some  national  exchanges  have  merged  in  recent  years  and  use  the 
same  technical  infrastructure.  These  systems  are  highly  integrated  and  co-ordination  of  tax 
administration  and  enforcement  between  the  countries  is  advisable.  Again,  applying  the 
residence  principle  as  outlined  above  could  mitigate  these  issues.  Therefore  the  preferred 
option for a harmonised FTT is a tax on the trading of financial instruments and derivatives 
thereof  by  financial  institutions  and  covering  shares,  bonds  and  related  derivatives  –  at 
notional  value  –  and  based  on  the  residence  principle.  The  inclusion  of  spot  currency 
transactions is subject to its legal feasibility. Primary markets for bonds and shares would be 
exempted as to mitigate the direct impacts on the financing of companies in the real economy.  

7.8. 

Impact of FTT 

Revenue estimates 

The revenue estimates for an FTT at a tax rate of e.g. 0.01% are between EUR 16.4 (with an 
elasticity of -2 and high volume decrease) and EUR 43.4 billion (with an elasticity of 0 and 

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low volume decrease) (0.13% to 0.35% of GDP) when all sources are accounted for and the 
value  of  the  asset  underlying  the  transaction  was  taken  as  the  taxable  amount.  If  the  rate  is 
increased  to  0.1%,  total  estimated  revenues  are  between  EUR  73.3  (with  an  elasticity  of  -2 
and  high  volume  decrease)  and  EUR  433.9  billion  (with  an  elasticity  of  0  and  low  volume 
decrease) (0.60% to 3.54% GDP).  

Relocation 

The revenue estimates for the variants of FTT heavily depend on the assumptions on volume 
decrease and on the elasticity of remaining trade volumes to the tax. The IA has retained two 
working assumptions on volume decrease (including relocation and disappearance), one (70% 
decrease) in line with existing studies on reaction in derivative markets, the second one (90% 
decrease)  slightly  higher  and  based  on  the  Swedish  experience.  These  assumptions  are  also 
based  on  the  development  of  high-frequency  trading  which  now  account  for  about  40%  of 
equity markets and would be severely affected by a FTT. The IA suggests that some elements 
of the design of the tax such as the place of taxation based on residence principle and the level 
of the rates are the most promising elements to mitigate the relocation risks. 

The introduction of additional taxes bears the intrinsic risk of agents relocating their activities 
to reduce the fiscal burden. Relocation might take place by moving the relevant activities to 
jurisdictions where they are taxed less, or by shifting to products/suppliers outside the scope 
of  taxation  within  the  same  jurisdiction.  Obviously,  the  risk  of  physical  relocation  of 
markets/market players and migration to non-taxed products decreases the more widespread is 
the adoption of the taxes and the broader is their scope. 

Macroeconomic impacts and employment 

The  model  used  to  analyse  the  macroeconomic impacts  suggests  that  at  0.1%,  a  transaction 
tax  on  securities  could,  without  the  application  of  mitigating  effects,  reduce  future  GDP 
growth in the long run by 1.76% of GDP and of 0.17% at a rate of 0.01%,. However, these 
results should be interpreted with caution given certain limitations of the underlying models. 
A limitation of the model is that it only takes into account the effects of an FTT on one source 
of financing, namely the issuance of equity. The effects on the costs of debt financing are not 
taken  into  account.  Due  to  this  limitation  the  model  could  overestimate  the  negative  GDP 
effects of the tax. Also, there is no available model to assess the proposed mitigating effects 
from  the  design  of  the  proposal  (e.g.  exclusion  of  primary  markets,  excluding  most 
transactions  that  do  not  involve  at  least  one  financial  institution,  etc.)  and  the  channels 
through  which  they  impact  macroeconomic  variables.  The  only  available  approach  is 
therefore  to  proxy  the  effects  with  the  large  caveats  and  uncertainties  that  such  an  exercise 
may carry. Under the assumption that all mitigating effects play in full, the output losses of 
the scenario without mitigating effects could be reduced from 1.76% to 0.53% of future GDP 
growth.  In  the  modelled  scenarios,  securities  transaction  taxes  at  rates  of  0.01%  and  0.1% 
would have limited negative impacts on employment of respectively -0.03% and -0.20%. 

Risk-taking and behavioural effects 

The aspects of dealing with risk and behavioural effects of the FTT relate to the possibility of 
the  FTT  to  curb  speculation,  noise  trading  and  technical  trade,  and  to  decrease  markets' 
volatility. While the economic literature concludes that the effects of the FTT on volatility is 
largely inconclusive and depends on market structure, it would be a very effective tool to curb 
automated high-frequency trading and highly leveraged derivatives. 

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Impact on capital costs and growth 

The effects of transaction taxes on the cost of capital (and thus firms' investment behaviour) 
have been investigated. A general theoretical result is that higher transactions costs, including 
those imposed by transaction taxes, are associated with lower asset prices. This may increase 
the cost of capital faced by firms. The effects on the security prices and on the cost of capital 
increase with the tax rate and are dampened by longer holding periods. Empirical studies of 
the  impact  of  the  tax  on  financial  markets  generally  confirm  the  theoretical  result.  The  IA 
suggests that the exclusion of primary markets for bonds and shares from the scope of the tax 
could be a promising way to mitigate the impact on capital costs. 

Incidence and distributional impacts  

A  large  part  of  the  burden  would  fall  on  direct  and  indirect  owners  of  traded  financial 
instruments. Specific design features of a FTT, such as those suggested in terms of definition 
of  the  taxpayer,  could  mitigate  the  impact  of  increased  capital  costs  on  the  non-financial 
sectors. 

Impacts on market structures and competitiveness effects 

The effects of a transaction tax depend on the market structure. This structure differs between 
market segments and also between countries. If this structure is heterogeneous, the tax might 
affect the markets in question very differently. The empirical literature comes thus to different 
results  when  evaluating  the  effects  of  transaction  taxes.  While  most  studies  find  that  trade 
volume is reduced, the effects on volatility and prices is less clear even though results based 
on panel data and estimation approaches that better identify transaction cost effects seem to 
find more often a positive relationship between transaction costs and volatility.  

The impacts of the taxes on the competitiveness of the real economy (industry and services) 
depend  to  a  large  degree  on  the  design  of  the  tax.  The  IA  suggest  that  limiting  the  taxable 
products  to  financial  instruments  as  defined  in  the  directive  on  markets  in  financial 
instruments (MiFID), thus excluding everyday financial transactions (such as the payment of 
bills  or  of  the  salary)  and  transactions  such  as  loans  from  banks  to  enterprises  or  private 
households  (such  as  mortgage  loans  or  the  provision  of  consumer  credits)  goes  in  the 
direction of ring-fencing the real economy from the direct effects of levying this tax. 

8. 

MONITORING AND EVALUATION 

The evaluation of the macroeconomic and microeconomic consequences of the application of 
the legislative measure could take place three years after the entry into force of the legislative 
measures  implementing  the  Directive.  The  Commission  could  then  submit  to  the  European 
Parliament and the Council a report on the technical functioning of the Directive.  

EN 

11 

   EN