International Tax Review: What benefits will the financial transactions tax (FTT) have when the Commission's own study suggested it will raise less revenue than its cost to GDP?

Manfred Bergmann: Those who claim that the Commission suggested that the FTT it proposed will raise less revenue than its cost to GDP either have not carefully read the Impact Assessment having come with the proposal or they deliberately quote figures out of the context so as to make a case for a negative scenario. They seem all refer to the second part of annex 15 of the Impact Assessment in which the Commission presented some model simulations of introducing a stylised tax on transactions in securities, showing a cumulative negative deviation of GDP in the long run of minus 1.76%.

But these model simulations were built on specific assumptions, such as that every investment was constrained by the investors' capacity to raise capital with the help of issuing shares.

This cumulative negative GPD figure was said to come down minus 0.53% when softening this unrealistic credit-constraint assumption and taking account of the powerful ring-fencing characteristics of the tax actually proposed.

This figure of an accumulated deviation from the baseline of minus 0.53% in the long run corresponds to an estimated impact on the annual growth rate of Europe's GDP of significantly less than 0.01%, while the tax is estimated to generate revenues of almost 0.5% of GDP on an annual basis.

So, where is the so-called "benefit problem" supposed to be? And these figures do not even take into account a proper growth-enhancing recycling of the revenue collected.

The bottom line is that the proposed tax is not having negative effects, neither on growth nor on employment in Europe. On the contrary, it could have positive impacts on growth and jobs, in case the money was properly recycled back into the economy.

ITR: The Alternative Investment Management Association (AIMA) believes the FTT could lead to a significant decrease in cross-border trading of financial instruments. Do you think this is true? If so, could this actually be a benefit of the tax?

MB: I do not understand the reasoning why the FTT could lead to a significant decrease in cross-border trading of financial instruments, as the tax does not discriminate international transactions as compared to purely national transactions. Both parties to a transaction will have to pay this tax, independent of whether they are deemed to be established within a single country or in two different countries.

The tax will probably discourage some short-term and frequently repeated transactions, such as high-frequency trading. The tax is also expected to negatively affect some highly leveraged derivatives as despite a tax rate of 0.01% on the notional amount of the underlying the effective tax rate on the capital actually put into such a highly-leveraged derivate might turn out to be rather high.

But this is not seen by the European Commission to be a problem in itself. On the contrary, it might help to deflate and consolidate markets a bit and bring the capital and assets moved more in line with the actual needs of the non-financial part of the economy. This latter is, after all, the 'raison-d'être' of the financial services industry.

ITR: Unless it's brought in globally, is the FTT just punishing the UK?

MB: No, of course not. The Commission has been keen tabling a proposal that does not harm the sustainability of financial centres, be they important as the City of London, or be they smaller. After all, and as a consequence of the application of the residence principle the Commission has proposed, it does not matter where a transaction is carried out but who is carrying it out and where the parties and financial institutions intervening are deemed to be established.

Also, one has to see this in perspective. The FTT, once implemented as proposed by the Commission, is expected to generate about €10 billion ($13.2 billion) annually from financial institutions deemed to be established in the UK. This compares with about €6 billion the UK is already raising from the City of London with the help of the stamp duty and the stamp duty reserve tax, the recently introduced tax on bonuses in the City of London and the bank levy.

Not even the accumulation of all these taxes – which could be phased out in case of a phasing in of the FTT - has caused an exodus from the City of London, although other member states do not have such taxes, not to talk about other financial centres in the world. Instead, bonuses handed out in the City of London have hovered around €10 billion annually until recently. So, there is no reason to assume that the introduction of the FTT will trigger a mass exodus of financial institutions from the City of London either.

Part two of the interview, in which Bergmann gives his thoughts on France’s decision to go it alone, can be read here.