FEW PEOPLE question the need for the financial sector to pay a much higher price for the financial crisis – for the huge sums taxpayers worldwide spent in saving banks too big to fail. Irish taxpayers have paid €64 billion to recapitalise the major domestic banks, an effort that has crippled the economy, almost bankrupted the State and led to a EU-IMF bailout.
International efforts to introduce a global financial transaction tax (FTT) – a small levy on financial dealings that would generate a substantial revenue stream in part to atone for past mistakes – have been unsuccessful.
Last year, the US and the UK, which have large financial sectors with dominant roles in global markets, both rejected the idea. And European Commission (EC) plans for an FTT for the EU have fared little better. The commission failed to secure the unanimous backing needed from all member states for an EU-wide measure.
Instead 11 euro zone countries, using treaty provisions that allow for “enhanced co-operation” between them, have agreed to operate a common European FTT. Ireland, however, will not be a participant.
Minister for Finance Michael Noonan has made it clear the Government supports the principle, but only if the tax is either applied on a global basis, or operated with the agreement of all EU member states. It finds the proposed FTT unacceptable. Ireland does not favour the use of “enhanced co-operation” in tax matters, as it could undermine the Government’s ability to retain a national veto on changes to the 12.5 per cent corporate tax rate or to the idea of a common corporate tax base.
The Government’s position remains open to criticism. On moral and equity grounds, the case for a transaction tax remains compelling. It can be seen as combining two important features, while also raising substantial revenues. An FTT would represent part reparation to taxpayers for past failures by financial institutions, and offer part insurance protection for taxpayers against the financial sector’s likely future excesses.
And it could raise substantial revenues: a joint Central Bank-ESRI study – based on the EU Commission proposals – suggested a yield of between €490 million and €730 million. An EU-wide tax, the commission said, could raise €57 billion. And, by rejecting a proposal the majority of euro zone states accepted, we are seen as unsupportive to those on whom we are most dependent, both for existing loan support and for ensuring an adequate measure of debt relief. Germany and France could become less sympathetic to our claims.
That said it is unfair to attack the Government’s decision as merely one of favouring the rich, and refusing to tax the banks. Government involves risk judgment and risk management. Some 33,000 people now work in the International Financial Services Centre, which accounts for 10 per cent of national income. Britain’s unwillingness to support FTT left the Government with a tough choice to make. In a globalised world, where capital and labour in the financial sector are highly mobile, competition is intense, and the domestic economy remains weak, the Government may have little or no choice.