IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
If adopted as a new own resource of the EU budget the financial transaction tax (FTT) will significantly reduce the contributions of member states to the EU budget, according to estimates presented yesterday by the European Commission. Member States’ contributions would be slashed by €54bn in 2020.The Commission proposes that two thirds of the revenues of the FTT go to the EU budget, reducing by the same amounts Member States’ contributions based on their GNI, with the remaining one third being retained by Member States.
If adopted, the FTT will increase EU own resources, which for the moment are (figures below are forecasts for 2012): - Traditional own resources (15% of the budget, €19.3bn), collected mainly from customs duties on imports from outside the EU and sugar levies. EU governments keep 25% to cover the cost of collection. - Own resource from value added tax (VAT) (11% of the budget, €14.5bn): A standard percentage is levied on the harmonised VAT base of each EU country. The VAT base to be taxed is capped at 50% of GNI for each country. This rule is intended to prevent less prosperous countries having to pay a disproportionate amount (in such countries consumption – and so VAT – tend to account for a higher percentage of national income). - Own resource based on gross national income (GNI) (73% of the budget, €93.7bn): A standard percentage is levied on the GNI of each EU country. It is used to balance revenue and expenditure, i.e. to fund the part of the budget not covered by other sources of income. The budget also has other sources of revenue, e.g.: taxes on EU staff salaries, contributions from non-EU countries to certain programmes, fines on companies for breaching competition laws, etc. The Financial Programming and Budget Commissioner Janusz Lewandowski said that in view of the fact that the financial sector does not pay VAT and has received massive support by taxpayer’s money, taxing the transactions of all financial institutions at rates as low as 0.01% is only fair. Furthermore, the estimated revenue which the tax would generate by 2020 can only be welcome by cash strapped governments across the EU. Some points he did not tackle however is the more than likely disincentive effect of such a tax on transactions, and the fact that there is no guarantee that the rate of the tax will remain as low in the future.