The financial sector could be slapped with a bill of up to €400 billion a year under a new transaction tax being considered by the European Commission. In an issues note that will be presented to EU finance ministers at a meeting on 7 September, the EU executive suggests the money would be raised by charging 0.1% on the trade in currencies, equities, bonds and over-the-counter and exchange-traded derivatives. However, the figure is much lower - around €64 billion - when derivatives are excluded.

The staff paper also suggests an alternative to make banks pay for the estimated €4 trillion that has been spent on bailouts and guarantees since the global crash in 2008 - a tax on profits and pay that it says would generate up to €26 billion a year within the 27-member bloc. Several EU member states have previously introduced profit taxes - including France, Italy and Denmark - while others, such as Sweden, the UK and Germany, have brought in special bank levies since the start of the crisis.

The Commission’s aim is to reduce risky activities, such as speculative trading in complex products, and to force the prosperous banking sector to contribute to the gaping budget deficits that are continuing to grow in the aftermath of the crisis. “The financial sector has been particularly profitable in the last two decades and there is a desire to ensure that the financial sector makes a fair and substantial contribution to public finances,” says the report.

While EU leaders in June agreed that a global transaction tax should be “explored and developed”, opposition from the US, Canada and Australia has forced the bloc’s policy makers to look inward and gauge whether levies can be concentrated within the bloc’s borders. While professing neutrality, the EU executive highlights several problems with a transaction tax. “Given the complexity of some financial transactions, the impact of a transaction tax and the feasibility of such a tax remain largely uncertain in many cases,” it says. A tax on profits, on the other hand, would be much more simple to bring in, says the report.

The non-paper is available at www.europolitics.info > Search = 277754

Financial taxes - two options

1. Financial transaction tax - turnover tax

Tax of 0.1% to raise between 64 billion and 372 billion euro a year

Complex to introduce

Risk of avoidance and higher costs to companies

Lack of clarity on who would bear the burden (traders, companies, customers) 

Legal obstacles (free movement of capital)

2. Financial activities tax - tax on profits and pay

Tax of 5% tax could raise between four billion and 26 billion euro a year

Easier to introduce

Lower risk of avoidance

Risk of tax being shifted to consumers

Different accounting rules in member states could make collection difficult