The European Commission’s Proposal for a Financial Transactions Tax: A Critical Assessment

Abstract:

A financial activities tax (FAT) and a financial transactions tax (FTT) are the main alternative ways of recouping some of the public money used to bail out the financial sector after the great crisis of 2007–08. In preparing a common proposal for the European Union, the European Commission initially appeared to favour the FAT, but then swung its weight behind the FTT in late 2011. Its rationale was that in addition to generating revenue, this tax could also help to stabilize the financial markets by curbing excessive speculative trading. This article takes a different position. Its central argument is that the FTT would amplify rather than dampen market instability by interfering with the functions of important financial institutions. Its chief conclusion is that the FAT is superior to the FTT.