The EU’s executive European Commission formally adopted on Wednesday plans for a financial transaction tax from January 2014, which it hoped would be extended worldwide.
The measure will need approval from EU states to become effective.
“With this proposal the European Union becomes a forerunner in the global implementation of a financial transaction tax,” EU Tax Commissioner, Algirdas Semeta, said in a statement.
“Our project is sound and workable. I have no doubt this tax can deliver what EU citizens expect -- a fair contribution from the financial sector. I am confident that our partners in the G20 will see their interest in following this path.”
Stock and bond trades would be taxed at the rate of 0.1 per cent, with derivatives at 0.01 per cent.
The EU executive said the tax would be imposed on all transactions in financial instruments between financial firms when at least one party to the trade is based in the bloc.
The revenue would be divided between the EU’s own budget to cut national contributions, with the rest going directly to member states.
The Group of 20 forum has tried and failed in the past year to agree on a global transaction tax as many countries fear it would be too easy for financial firms to evade.
Canada, Britain, the United States, Australia and China oppose the tax because it puts more burden on banks, while France, Germany, Austria, Belgium, Norway and Spain support it, along with several African states.
Britain, the EU’s biggest financial centre, reiterated on Wednesday such a tax would only work globally. “The government will continue to engage with its international partners on Financial Transaction Taxes and has no objection to them in principle. But any financial transaction tax would have to apply globally and there are a number of practical issues that need to be worked through,” a U.K. Treasury spokesman said.
Without Britain’s backing, there may be an attempt to introduce the tax at first only in the 17 euro zone countries.
“The proposal would introduce new minimum tax rates and harmonize different existing taxes on financial transactions in the EU,” the executive added.
Britain, for example, already imposes a small stamp duty tax on share trades and has also introduced a levy on bank balance sheets.
A European Commission impact study on the tax said there are strong risks of transactions relocating to countries not applying the levy.
With a tax rate of 0.1 per cent, the Commission’s models showed drops of up to 1.76 per cent in gross domestic product in the long run.
And now onto the Asia...
As debate rages in the U.S. and U.K. over top-end tax rates, Japanese authorities appear to be adopting a different approach: soak the rich, quietly.
And while their plan still faces political obstacles, Japanese policy makers have at least managed to avoid the accusations of “class warfare” levelled at U.S. President Barack Obama over his effort to lift taxes on the wealthiest Americans.
To be sure, the redistributive element of Japan’s reconstruction tax proposal is buried safely in the small print. While the government has proposed a flat 5.5 per cent surcharge on income tax, deductions that slash the standard bill for lower income payers mean it’s the better-heeled that will really pay.
For a family with two children on a single annual salary of ¥5-million ($65,500) a year -- a level close to the median -- the government’s tax panel estimates the extra cost of the 5.5 per cent hike at a mere ¥4,300 a year. But a similar family earning ¥10-million annually would pay an extra ¥36,700 and one on ¥100-million would have to stump up ¥1.84-million.
That means the temporary hike marks a small but potentially important turning point in the general trend of recent decades toward lower income tax rates on Japan’s rich.
Such a turnaround should not be a surprise. Japan once boasted of its creation of a “nation of middle-class” but falling average salaries and a shift toward temporary and contract employment have largely destroyed the post-war dream of salaryman “job-for-life” security.
Worries about income inequality were one factor in the rise to power in 2009 of the left-of-centre Democratic party. Mainstream political discussion is dominated by talk of how to ease the travails of a squeezed middle rather than of ways to cultivate “wealth creators” by coddling the better-off.
Cynics claim that many of Japan’s richest pay less than their fair share of tax. This was a perception fuelled by revelations in 2009 that the prime minister at that time, Yukio Hatoyama, had failed to pay the required tax on more than ¥1-billion in funds given to him by his heiress mother over six years.
Mr. Hatoyama eventually handed over hundreds of millions of yen in overdue tax -- but forgiving officials gave some of the money back because the statute of limitations for payment had expired.
So wealthy taxpayers will be wise not to make too much of a fuss about the temporary hikes. After all the tsunami reconstruction surcharge is still only a tweak to a tax system that captures only the equivalent of 17 per cent of gross domestic product, one of the lowest levels among advanced economies.
It would be seen as poor taste to oppose a tax hike intended to ease the suffering of the residents of the stricken north east whose stoicism in the face of the March 11 disaster drew worldwide admiration.
One of the best arguments for higher taxes on the rich is their potential to reinforce public confidence that all income groups are sailing in the same national boat. Japan, after all, is still a nation mercifully free of the kind of crime-ridden no-go zones that mar some U.S. cities or the riots that raged across English communities this summer.
Prime Minister Yoshihiko Noda has himself suggested that social calm is not guaranteed, warning this month that the dismay of people who fall out of the middle class could “eventually turn to despair and then to anger, and then the collapse of the stability of the Japanese society from its core”.
Many top-rate taxpayers are no doubt still hoping that worries about a faltering economic recovery will at least force the postponement of the temporary tax hikes. But Japan’s dire fiscal trends mean generally higher taxes are all but inevitable. This will not be the last attempt to ensure the rich pay more.
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