The EU “Tobin Tax”: A Paradox in-between Anti-globalization Social Justice and Supranational Market Harmonization

Raffaele Marchetti, Professor of International Relations, LUISS University, Italy

Raffaele Marchetti, Professor of International Relations, LUISS University, Italy, specially for

The idea of placing a small tax on currency conversions transactions was first suggested in 1972 by the later Nobel Prize winner James Tobin [1]. In its original formulation, the tax was understood as within the contours of sound economic policy: as an effective way to moderate the negative effects of short term speculations following the end of the convertibility of the dollar to the gold and the subsequent international financial volatility brought about by Nixon’s 1971 decision.

Only in the nineties, thanks to the sustained attention by the wider public of civil society organizations, the tax came to be seen as an important instruments to tame global financial transactions (not only currency conversions) in the name of democratic political control and to generate revenues for development in the name of global distributive justice. The transformation in the content of the tax provoked by the debate within civil society was so strong that later on Tobin distanced himself from it.

Forty years after Tobin’s proposal and twenty years after civil society mobilization, the EU implemented the idea of a transnational financial taxation. On 14 February 2013 the European Commission adopted a proposal for a financial transaction tax. It took more than forty years for the idea to become a legal instrument. The end result (so far) is different from the original proposal but also different from the various proposals formulated in these four decades. And yet such legalization is widely interpreted as an important (albeit small) step in the direction of regulating global finance in the name of global justice. At the same time, however, the tax also serves the needs of regional harmonization between the different taxation regimes of the EU member states. In a way, it stands in a middle of a paradox: on the one hand, it is seen as an instrument for countering global economic forces in the name of social justice; on the other hand, it is also a tools to optimize the efficiency of a supranational market area such as the European market.

How did we move from the proposal of an American scholar to the legal reception by a European institution? Many factors should be taken into account, but a crucial role has been played by three specific determinants. A first decisive element was provided by the financial crisis that put the financial circles under accusation and consequently the political establishment under pressure to provide for new regulations to tame the transnational financial powers. A second equally important element has been the mobilization of civil society actors that has kept the issue of the so-called Tobin tax alive in public debates. A third element was the adoption of a “tobin tax” by some EU member states, thus creating asymmetry within the European Common Market.

The civil society campaign emerged during the public reflection following the financial crises of the late XX cent. It was promoted by the efforts of a number of civil society organizations including the Halifax Initiative, the French NGO Association for the Taxation of Financial Transactions (Attac), the British NGO War on Wants, the German think tank World Economy, Ecology and Development (WEED), and the network Institute for Global Democratization (NIGD), together with the indirect support of some international organizations, experts and states.

The overall background within which the campaign framed its message was the context of globalization, characterized as it is by the so-called “end of the marriage” between the state, the market, and the labor. It is in such context that the increasing asymmetry between the taxation on those economic activities still anchored to the national dimension, and those that are mobile at the transnational level was put under the target of public criticism. An accusation was first and foremost moved against those global financial actors doing “forum shopping” in search of safe havens providing the most convenient jurisdiction and the least demanding taxation regime. This economic mobility was depicted as utterly illegitimate in relation to the “rooted” citizens and the “territorial” states which remained unable to respond to such “unfair” competition, but still providing for crucial infrastructures and resources that the financial actors were exploiting in a free-rider manner. As a response to such situation created by the liberalization of the international financial transactions (originally promoted, it is worth remembering, by US/European institutions themselves in the eighties and nineties), the proposal for a taxation scheme able to seize in a political net those unbridled forces was considered the most effective and feasible.

The breakthrough by the European Union

At the beginning of this year, the European Commission adopted a proposal for a Council Directive for a common system of Financial Transaction Tax (FTT) which had been tabled originally on September 2011 on the basis of the request of eleven Member States (Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia). The proposal for a Directive concerns the implementation of the enhanced cooperation in the area of FTT, in accordance with the authorization of the Council of 22 January 2013, issued following the European Parliament's consent given on 12 December 2012.

The European institutions decided for such an action on the basis of the consideration that “the financial sector has played a major role in causing the economic crisis whilst governments and European citizens at large have born the costs. Even though it is made of a wide variety of market actors, the financial sector at large has experienced high profitability over the last two decades which could be partially the result of an (implicit or explicit) safety net provided by governments, combined with financial sector regulation and VAT exemption” [2]. As a consequence, in this period of financial difficulty, the EU institutions argue that the financial sector needs to participate in the cost of re-building the economies and bolstering the public finances of the participating Member States.

However, beyond the public indignation for the irresponsibility of the “financial speculators”, the EU decision was also based on another reason of a very different kind. As a consequence of the financial crisis exploded in 2008, some Member States started to implement additional forms of financial sector taxation, whilst other Member States already had in place specific tax regimes for financial transactions (e.g., Sweden adopted such a tax since 1984). These uncoordinated taxation moves led to the undesirable effect of a fragmented tax treatment in the internal market for financial services. An harmonization of legislation concerning the taxation of financial transactions to the extent necessary to ensure the proper functioning of the internal market for transactions in financial instruments and to avoid distortion of competition was then deemed necessary by the European institutions.

Following these two different reasons, the main objectives of this proposal were then set officially as the following:

– harmonizing legislation concerning indirect taxation on financial transactions, which is needed to ensure the proper functioning of the internal market for transactions in financial instruments and to avoid distortion of competition between financial instruments, actors and market places across the European Union, and at the same time

– ensuring that financial institutions make a fair and substantial contribution to covering the costs of the recent crisis and creating a level playing field with other sectors from a taxation point of view

– creating appropriate disincentives for transactions that do not enhance the efficiency of financial markets thereby complementing regulatory measures to avoid future crises.

It is evident that political reasons related to equal participation in the burden of societal costs became relevant only when also other reasons related to internal market efficiency, namely the avoidance of evasive actions, distortions and transfer to other jurisdictions, and discriminatory asymmetries became pressing.

While the decision is certainly a step forward in terms of democratic control of unregulated global finance it should also be noted that it diverts from the original intention. What is in fact missing in this decision is the outward effect in terms of financing development in third countries. Instead the revenues deriving from the tax will be spent in part for the EU budget, resulting in a corresponding reduction of the national GNI contributions of participating Member States and possibly becoming the base for a new own, transnational resource for the EU budget. The remaining money for the national budgets could be used to help consolidate public finances, invest in growth-promoting activity, or possibly meet development aid commitments. Ultimately, it will be for participating Member States to decide how the revenues of the FTT should be used. From an other-regarding perspective, as it was originally conceived, the tax has been turned mainly into a self-regarding instrument. And yet, it still marks a progress in the direction of the reaffirmation of the centrality of the political action, while also contributing to equalizing the taxation field within the EU.

The scope of the tax is wide, because it aims at covering transactions relating to all types of financial instruments as they are often close substitutes for each other. Thus, the scope covers instruments which are negotiable on the capital market, money-market instruments (with the exception of instruments of payment), units or shares in collective investment undertakings – which include undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIF) and derivatives contracts. Furthermore, the scope of the tax is not limited to trade in organized markets, such as regulated markets, multilateral trading facilities or systematic internalisers, but also covers other types of trades including over-the-counter trade.

While the 'FTT jurisdiction' is limited to participating Member States, anti-avoidance of taxation is pursued through rules whereby taxation follows the "issuance principle" as a last resort, which compounds the "principle of establishment", which is maintained as the main principle. Indeed, by complementing the residence principle with elements of the issuance principle, it will be less advantageous to relocate activities and establishments outside the FTT jurisdictions, since trading in the financial instruments subject to taxation under the latter principle and issued in the FTT jurisdictions will be taxable anyway. This is expected to mitigate the temptation to relocate. Financial operators in fact would only be able to avoid the FTT if they were prepared to relocate, abandon all their clients in the 11 Member States (which together amount to 2/3 of the entire EU GDP), and refrain from any interaction with financial institutions established in the participating Member States.

Preliminary estimates indicate that, depending on market reactions, the revenues of the tax could be between EUR 30 and 35 billion on a yearly basis, corresponding to 1% of the participating Member States' tax revenues.

Social Europe vs. Market Europe

The decision to adopt a tax on financial transaction unilaterally by the EU has come as a surprise for many. For many years the common assumption was that unless such taxation scheme was adopted multilaterally it would have been unsustainable. Financial actors would have left the taxing country searching for better conditions somewhere else. And yet, the regulation has been adopted and the expectations are actually positive in terms of additional revenues for the economies involved. It is perhaps too early to say whether this projection will materialize and stay the course in the long term. What can be stressed now is that the new regulation is a very significant achievement because it addresses one of the most unconstrained dimensions of the global economy. In a way, it signals a strong reaction to the neo-liberal model of globalization that has marked for almost three decades our time. It is definitely a result of the dramatic economic crisis that has affected first the USA and then the European continent. However, it cannot be also overstated the relevance of civil society actors in promoting a different understanding of transnational financial transactions and the subsequent need for new forms of regulations able to overcome the constrains of national jurisdictions. The popular support for the tax and the incumbent crisis were indeed crucial for empowering the otherwise weak EU decision-makers in passing a Directive that clearly damage the interests of transnational finance. As suggested, however, the final result remains somehow paradoxical in-between social justice aspirations and market efficiency goals, trying to combine the unreconcilable anti-globalization forces with the pro-market integration interests. Perhaps confirming the unavoidable tension within the EU between the “social Europe” and the “market Europe”.


[1] Tobin, James. (1978) A Proposal for International Monetary Reform. Eastern Economic Journal 4:153-59.
[2] European Commission (2013) Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax, Brussels, COM(2013) 71 final.