Tobin tax 'could cost EU €116bn'

THE FINANCIAL transaction tax could end up leaving the European Union public finances with a €116bn hole.

A report by Ernst & Young concluded that the EU's original estimate of €37bn revenue to be raised from the so-called Tobin Tax - which imposes a 0.1% charge on transactions between financial institutions - was based on "overly optimistic" assumptions. It warns that there will be a €2bn loss on tax revenue even under the most optimistic assumptions. However, this figure does not take into account falls in other tax revenues, such as capital gains, or the effect on the financial services sector.

Marie Diron, economic advisor to Ernst & Young Eurozone financial services forecast, said: "The [European] Commission has acknowledged that it did not address the impact of lower GDP on revenue collection from other taxes. Even when modelled against the best case scenario this incurs a €39bn loss, making the net impact on overall tax revenues a loss of €2bn. Importantly, 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."

The EC has acknowledged that the GDP loss could as much as 1.76%. "If output losses were this substantial they would result in a loss of government revenue of around €128bn," the report said.