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Resistance mounts to 'Tobin tax' as cost estimated at €116bn

GLOBAL - Industry umbrella groups and academics have warned about the impact of the European Commission’s proposed financial transaction tax (FTT), claiming the levy would fail to address the market volatility it seeks to fight.

Ernst & Young predicted that, as a result of falling tax revenues and a decline in GDP of 1.76%, such a tax would end up costing public finances €116bn.

Marie Diron, economic adviser at the company’s financial services department, noted that the Commission had not taken account of this loss in member countries’ domestic tax income when compiling its impact assessment - a point it has now acknowledged.

She added that even the best-case scenario - compared with its €116bn estimate - still saw an economic impact of €39bn.

“Importantly,” she said, “these figures do not take into account the likely fall in capital gains tax nor the full extent of the decline in revenues from the financial sector itself, which will significantly increase the loss in total revenue.”

France’s EDHEC Risk Institute meanwhile predicted that the Tobin Tax, named after Nobel laureate James Tobin, was unlikely to reduce overall volatility.

Outlining EDHEC Business School professor Raman Uppal’s view on the tax, it said: “The Tobin tax reduces speculative activity in financial markets, but this tax also drives away investors who provide liquidity and stabilise prices.”

It concluded that, while the tax had its advantages and disadvantages, the net effect on volatility would be small.

Germany’s BVI, the umbrella organisation for the country’s fund and asset management industry, warned that the tax would hit pension savers hardest, as well as penalise a fund industry that had not received state aid during the crisis.

Thomas Richter, managing director of the BVI said: “The impact would mainly hit companies and investors based in Germany, as well as long-saving citizens who had been encouraged toward occupational pension saving due to the demographic change.”

The German group also warned that funds would suffer from a competitive disadvantage - while real estate funds would be subject to the transaction fee, the sale of direct property holdings would not be taxed further.

It echoed EDHEC’s findings that the tax would be unlikely to reduce risky and counterproductive transactions and would simply increase the price of transactions for the end consumer.

Dutch pension groups today also warned of the FTT’s impact, telling the country’s finance minister that its introduction could lead to a 10% reduction in pension benefits.

The warning comes only days after the Dutch pensions regulator warned that as many as 40% of pension savers already faced benefit cuts due to falling funding levels.

Resistance to the Tobin Tax flared up again following recent comments from French president Nicolas Sarkozy and his German counterpart Angela Merkel, with French government officials indicating that the levy could be in place domestically by the end of the year.

Italy’s prime minister Mario Monti yesterday also seemingly backed the FTT following a meeting with Merkel, noting that he had been a student of Tobin’s and that the chances of the tax being introduced in Italy were now better than before he assumed power.

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