The European Union’s proposal for a financial-transaction tax will favor pension funds that buy and hold securities as part of a conservative long-term strategy, according to a technical paper sent to member nations today.
The European Commission, the EU’s regulatory arm, has opposed exempting pension funds from the wide-ranging tax it wants to impose on the trading of stocks, bonds, derivatives and other financial contracts. The paper offers details on how the tax would affect pension funds, repurchase-agreement markets and other areas where opponents have flagged potential dangers.
The proposed transaction tax probably would affect actively managed funds more than those that buy and hold securities, the paper says. It cites research that actively managed funds earn lower returns for their investors and that derivatives can harm pension portfolios, while saying that affecting market behavior is a “secondary” goal rather than the proposal’s objective.
“Asking for an exemption or special treatment under the FTT directive for pension funds would undermine the level playing field between various products available for savings and requirement,” according to the technical paper, provided to reporters in Brussels.
The commission continues to push for the broad tax it proposed last fall. Many countries in the 27-nation bloc have opposed the initiative outright or offered slimmed-down plans that would tax only shares and bonds, not derivatives.
A less-ambitious proposal that was adopted quickly could win backing as part of a long-term strategy to put a tax in place, an EU official, who requested anonymity because talks are ongoing, told reporters in Brussels today. Such a lowest-common- denominator approach should augment, not replace, efforts to install a more comprehensive tax, the official said.
The commission says its version of the tax could raise 57 billion euros ($75 billion) annually, while also discouraging transactions like high-frequency trading that it considers more risky for the financial system.
The tax would depress long-term economic growth by 0.28 percent and increase the cost of capital by seven basis points, according to today’s technical paper. This compares with the commission’s previous estimate of a 0.53 percent hit to growth.
The commission proposal wouldn’t affect consumer transactions and outright lending and borrowing. Stock, bond, derivatives and repurchase-agreement markets would be covered.
The information paper says that 95 percent of European companies have access to “alternative sources of finance that are not subject to the tax” like bank loans and venture capital funds. The EU official said the commission is not trying to penalize capital markets or increase reliance on banks.
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