The European Commission proposal for the introduction of a Financial Transaction Tax (FTT) and its potential effects on Malta

Abstract

In November 2011, the European Commission put forth a proposal for the introduction of a financial transaction tax (FTT). The proposal is intended to compel the financial sector to make a fair contribution towards EU fiscal consolidation after having benefited from significant financial support during the financial crisis that was triggered by the failure of the Lehman Brothers Holding Inc. The FTT is also intended to discourage speculative trading activities that lead to the destabilization of financial markets. The Commission backs its proposal by means of an Impact Assessment which assesses the effects of its proposal for the EU as a whole, but not for the individual Member States. Hence, this study seeks to examine the potential impact that the FTT would have on Malta's economy and in particular on its attractiveness as a financial domicile. The analysis undertaken in this dissertation starts by an overview of the three proposals put forth by Keynes, Tobin and Spahn, respectively, and proceeds to carry out a review of the literature that teases out the main underlying issues of an FTT. It then analyses the Commission's proposal in light of the findings of the literature review, and assesses its potential geographical application. The study examines the impact of the FTT on the Maltese economy and in particular weighs the potential new revenue stream against the economic costs of such a tax. Given the highly politicized nature of the topic, the study takes a brief look at the political perspective of the FTT from the national as well as from the overall EU perspective and places this against the prevailing EU financial crisis. It then concludes by recommending the proper examination of alternative policy instruments to the FTT.