EU backs bank tax, but sees financial transaction tax only on global level

By Gabriele Steinhauser, AP
Thursday, October 7, 2010

EU backs bank tax, fuzzy on use of revenue

BRUSSELS — The European Union on Thursday backed the introduction of an EU-wide tax on bank profits and pay packages, but sidestepped the key question of what the revenue should be used for.

The European Commission, the EU’s executive arm, also said a separate tax on financial transactions such as the purchase of stocks, bonds and foreign currency would only work if applied on a global level.

The commission previously considered introducing such a financial transaction tax in the EU — a move that was supported by France and Germany, but strongly opposed by the U.K., the EU’s biggest financial center.

Both proposals arose in response to the global financial crisis that began in 2007 and has forced governments in Europe and the United States to pour billions of taxpayer money into troubled banks. The taxes would be aimed at making good taxpayers’ losses,

EU finance ministers will discuss the commission’s proposal on both tax proposals at their next meeting Oct. 19 in Luxembourg. It will then need to be adopted by member states’ governments, which are currently considering a number of different inititives on financial services taxation.

Similar proposals are also being discussed in the U.S. and will be on the agenda at a summit of the Group of 20 rich and developing nations in Soul, South Korea, next month. However, chances for a consensus on the financial transaction tax look dim, since the U.S. government has opposed it.

“The financial sector is currently undertaxed,” especially considering the high payouts it received during the credit crisis, EU tax commissioner Algirdas Semeta told journalists. A tax on profits and remuneration is the best way to address this problem and at the same time raise much-needed revenues for member states, he added.

The commission hasn’t decided on the level of the tax, but Semeta said a tax rate of 5 percent on banks’ profits and wages would raise about €25 billion across the EU’s 27 member countries.

The proposal comes as some EU countries, such as Ireland, are still struggling with the cost of bailing out their banks amid the financial crisis. Most countries are desperate for new funds as they try to slash large budget deficits built up during the downturn and as European economic recovery remains fragile.

Semeta’s initiative is separate from an earlier commission proposal for a levy on banks’ balance sheets, which is backed by France, Germany, and the U.K.

EU governments are divided on what the money raised by any bank tax should be used for. Germany has said that revenues should go into a special fund that would finance future bailouts. France and the U.K. meanwhile want to use the money to plug holes in their general budgets.

Politicians across the 27-country bloc face anger from taxpayers, who feel that they have shouldered the costs of banks’ risky practices.

EU governments paid out funds amounting to 16.5 percent of the EU’s gross domestic product to support financial companies during the credit crunch, according to EU data. Ireland last month said that the cost of bailing out its banks would push its 2010 deficit to almost one-third of GDP.

Semeta said he is “very committed to campaigning for a financial transaction tax on a global level.” Revenues from this tax could help fund development aid or climate-change projects, he said.

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