The Effects of a Financial Transaction Tax on European Households’ Savings SPECIAL INTEREST PAPER CITY OF LONDON CORPORATION
EXECUTIVE SUMMARY
The Effects of a Financial Transaction Tax on European Households’ Savings was prepared for the International Regulatory Strategy Group (IRSG) and is published by the City of London. The author of this report is London Economics. This report is intended as a basis for discussion only. Whilst every effort has been made to ensure the accuracy and completeness of the material in this report, the authors, London Economics, and the City of London, the IRSG and TheCityUK give no warranty in that regard and accept no liability for any loss or damage incurred through the use of, or reliance upon, this report or the information contained herein. February 2014 Š City of London PO Box 270, Guildhall London EC2P 2EJ www.cityoflondon.gov.uk/economicresearch
The Effects of a Financial Transaction Tax on European Households’ Savings SPECIAL INTEREST PAPER CITY OF LONDON CORPORATION
EXECUTIVE SUMMARY
www.cityoflondon.gov.uk/economicresearch
The Effects of a Financial Transaction Tax on European Households’ Savings
Executive summary
Context
This study considers the impact of the proposed financial transaction tax (FTT) on European households’ savings arising through its effect on the value of equity and debt holdings.
Financial assets are an important instrument for saving for European households, providing them with access to emergency funds and allowing them to build future retirement income.
The effect of the tax is considered in six EU Member States. Four of these countries are planning to participate in the FTT (Germany, Italy, Spain and Slovakia) and two are not (Luxembourg and the United Kingdom). The selection of countries aimed to capture a mix of larger and smaller Member States, Member States in different parts of Europe and, in turn, different rates of savings through equity and debt.
When deciding how to save, households face a choice between financial and real assets (such as housing). In the euro area as a whole, 17% of household savings are held directly in financial assets. However, this figure masks considerable variation across countries: for instance, in Slovakia the proportion is 8%, compared to around 36% for Germany.1
The EU proposal for an FTT of 14 February 2013 covers a broad range of financial instruments, including debt and equity, and if introduced, the tax would be applicable to secondary market transactions involving financial institutions from participating Member States (the residence principle) and instruments issued in participating Member States (the issuance principle) at a rate of 0.1% of the value of equities and bonds.
Households hold various types of financial assets. In the UK for instance, life insurance and pension funds are highly important instruments for savings, as they make up over half of total financial savings. Meanwhile, in Italy, there is a high level of direct investment in financial markets, with 40% of household savings being held directly in the form of equity or debt; this figure is 23% in Spain. By age, holdings of financial assets show very clear ‘life-cycle’ behaviour in many countries: financial savings increase up to 64 years of age (as a primary motive for financial saving is providing funds for retirement) after which they fall (as older people drawdown on these funds during retirement).2 These findings indicate that households participate in financial markets; that household participation takes a variety of forms; and, among other reasons, that saving through financial assets is an important means of retirement provisioning. Given this, the functioning of capital markets through which households save is of significant policy interest.
2
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The proposed financial transaction tax and household savings This study considers the impact of the proposed financial transaction tax on European households’ savings. Data on household savings and trading activity used for the analysis are available as at the end of 2011. The estimates therefore reflect what the impact of the proposed FTT would be if it were in place then – without any behavioural effects resulting from the introduction of the tax. In particular, the effect considered is the instantaneous price adjustment resulting from the introduction of the tax: If the FTT is introduced, its expected costs would be capitalised into the price of assets subject to the tax and the price adjustment would take place practically instantaneously, thereby affecting the value of household equity and debt holdings. There exists a significant body of empirical evidence supporting the existence of instantaneous price adjustments.3 4 5 6 7
Methodology Data from two information sources were used to construct the financial portfolios: n Data on the household financial portfolios of domestically and foreign issued equity and debt holdings, available from Eurostat;8 n Data on the distribution of household and country-wide financial portfolios in equity and debt across many issuing countries, available from the IMF Coordinated Portfolio Investment Survey (CPIS).9 The latter information was used to split the foreign component of the Eurostat equity and debt portfolio into a portfolio of holdings from FTT-participating countries (other than the home country if the latter is a participating country) and FTT non-participating countries. Data on trading frequencies used for the calculations of the impact of the FTT were drawn from two sources also. For equities, the actual 2011 turnover rate (i.e. annual turnover/average market capitalisation during the year)10 was used and sourced either from the annual statistics published by Federation of European Securities Exchanges (FESE) or from the statistics produced by the various stock exchanges. For debt, inter alia trading data provided by Tradeweb11 were used.
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The Effects of a Financial Transaction Tax on European Households’ Savings
What are the reasons for differences across Member States?
Summary of main findings The results of the analysis show that the impact of the FTT on household savings is expected to be large in some Member States. In countries that plan to introduce the tax for example, the impact is in the order of €80bn (Spain) to €205bn (Italy), representing a loss of up to 16% of the value of the assets being taxed. Household savings are expected to be less affected by the FTT in other Member States: in non-participating states such as Luxembourg and the United Kingdom; and in participating Member States such as Slovakia.
The larger the expected costs of the tax, the larger the loss in value of household savings. Expected costs are larger: (i) the more frequently asset transactions subject to the tax take place (a trading frequency effect); and (ii) the larger the number of intermediate transactions required to transfer the asset between end-investors in transactions subject to the tax (a cascade effect). The expected impact is larger for households in participating than in non-participating Member States. This is because households in nonparticipating Member States are less likely to have their transactions taxed under the issuance principle (that is, domestically issued equities and debt are not subject to the FTT under the issuance principle). The expected impact of the FTT on household savings also depends on the mix of equity and debt assets households own. With the exception of government debt, equities tend to be traded more frequently than debt meaning that households that hold relatively more equity than debt are likely to suffer greater losses to the value
Figure 1: Total impact of the FTT on household savings in equity and debt holdings
@bn
Percentage of equity
Percentage
and debt holdings
of GDP*
Participating Member States Germany
-150.6
-14.1% -5.8%
Italy
-204.9
-12.3% -13.0%
Spain
-79.6
-16.0% -7.6%
Slovakia
-0.1
-2.3% -0.1%
Non-participating Member States
4
United Kingdom
-4.4
-0.6%
Luxembourg
-0.4
-2.2% -0.9%
Note: *Impact scaled as a percentage of GDP, not impacting GDP directly
-0.2%
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The cascade effect of their savings if the tax is introduced – the trading frequency effect is more significant for these households. Equally, assets issued in different countries change hands at different rates so households holding assets issued in countries where assets are traded more frequently are also likely to suffer greater losses in the value of their savings. The results presented account for all of the considerations described and below we provide a breakdown of the total impact of the FTT shown above by security type.
The inclusion of intermediaries within the scope of the FTT significantly increases the tax incidence, creating a cascade effect. In particular, it is typical for the transfer of an equity or bond between end-investors to attract ten instances of the tax, equivalent to 100bps.12 13 Indeed, the impact on the value of savings is significantly reduced when the effective tax rate is only 20 basis points, i.e., all the financial intermediaries in the trading chain are exempt from the tax. For example, the loss in the value of savings is reduced to 3-4% of the value of the initial equity and debt holdings in the case of Germany, Italy and Spain.
Figure 2: Breakdown of impact of the FTT on household savings in equity and debt holdings, by asset class
Total (@bn)
Equity (@bn)
Debt (@bn)
Participating Member States Germany
-150.6
-148.4 -2.21
Italy
-204.9
-195.4 -9.46
Spain
-79.6
-79.2 -0.41
Slovakia
-0.1
-0.1 -0.0**
Non-participating Member States United Kingdom
-4.4
-4.4
Luxembourg
-0.4
-0.4 -0.0**
-0.0**
Note: **smaller than 0.005 *smaller than 0.05
Figure 3: Comparison of the overall impact on the value of savings of a 100 bps and 20 bps effective FTT Reduction in the value of equity
and debt holdings (%) 100bps 20bps
Participating Member States Germany
-14.1% -3.6%
Italy
-12.3% -3.1%
Spain
-16.0% -4.0%
Slovakia
-2.3% -0.5%
Non-participating Member States United Kingdom
-0.6%
Luxembourg
-2.2% -0.5%
-0.1%
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The Effects of a Financial Transaction Tax on European Households’ Savings
Immediate impact on savings
Macroeconomic impacts
The immediate loss in the value of household savings expected as a result of the introduction of the FTT is a multiple of annual household savings in some Member States. If the tax were introduced in Spain for example, households would have to save for an entire year in order to restore the value of their savings to their level prior to the introduction of the tax; in Italy, they would have to save for eighteen months.
Recent studies from the ECB and IMF show that typically, a 10% change in the value of household savings reduces aggregate household consumption by 1% in the long run.14 As consumption accounts for between 56% and 62% of GDP (except in Luxembourg), the impact on the value of savings described suggest that, all else being equal, the level of GDP (at constant prices) would be between 0.5% and 0.8% lower in the long run as a result of the impact on the value of savings arising from the proposed FTT.
-0.02%
-0.2
-0.2%
Luxembourg
United Kingdom
Slovakia
Spain
Italy
0.0
Germany
-0.1%
-0.4 -0.6 -0.8 -1.0 -1.2 -1.4
Per cent of portfolio
% of household consumption
Figure 4: Impact of the FTT on the long-run level of household consumption (at constant prices)
-1.2% -1.4%
-1.6 -1.6% -1.8
Househ
German
of GDP
-0.1
-0.01%
Luxembourg
United Kingdom
Slovakia
Spain
Italy
0.0
Germany
6
Note: the estimated impact for the UK is reported to 2 decimal places because the effect is comparatively small; the estimates for other countries are reported to 1 decimal place because, due to uncertainty about the estimates, reporting them to 2 decimal places would imply a greater precision than can be interpreted from the estimates. Source: London Economics’ analysis based on Eurostat sector accounts and the IMF Coordinated Portfolio Investment Survey and Ricardo (2009) and Ludwig and Sløk (2001)
Spain
Italy
% of household consumption
Finally, it is important to note that this study considers the effect of the instantaneous 0.0 price adjustment resulting from the introduction -0.02% -0.1% -0.2tax. of the -0.2%
-0.4
In the long-term, or, on an ongoing basis, -0.6 savings may also be affected. Two important -0.8 considerations in this regard are as follows. -1.0
Households may not respond to the loss in value of -1.2 their savings by increasing their savings rate. If they -1.2% -1.4 increase their savings rate, savings may do not -1.4% be permanently lower due to the introduction -1.6 of the FTT. For example, -1.6% households which invest -1.8
in financial assets through a vehicle (UCITs fund, pension fund or life insurance) will see the value of their savings eroded over time as the FTT will be levied on any changes in the portfolio, which for an actively managed fund can lead to a significant cost.15 Household incomes, and therefore savings, will also fall with the introduction of the tax through other channels. This is due to the effect the tax is expected to have on the cost of capital and in turn GDP, as discussed elsewhere (see London Economics, 2013 16). Per cent of portfolio
Luxembourg
United Kingdom
Slovakia
Germany
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Household consumption Germany
Italy
Spain
Slovakia United Kingdom Luxembourg
Luxembourg
Luxembourg
United Kingdom
Slovakia
Spain
Italy
Germany
0.0
-0.01%
-0.1
-0.1%
-0.1%
Italy
-0.5
-0.5%
-0.6 -0.7
-0.7%
-0.8 -0.8% -0.9
Note: the estimated impact for the UK is reported to 2 decimal places because the effect is comparatively small; the estimates for other countries are reported to 1 decimal place because, due to uncertainty about the estimates, reporting them to 2 decimal places would imply a greater precision than can be interpreted from the estimates. Source: London Economics’ analysis based on Eurostat sector accounts and the IMF Coordinated Portfolio Investment Survey and Ricardo (2009) and Ludwig and Sløk(2001)
Germany
-0.4
Spain
-0.3
Slovakia
-0.2
Per cent of portfolio
% of long-run level of GDP
Figure 5: Impact of the FTT on the long-run level of GDP (at constant prices)
Household consumption
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The Effects of a Financial Transaction Tax on European Households’ Savings
Endnotes 1 Data sourced from ECB (2013), ‘The Eurosystem Household Finance and Consumption Survey: Results from the First Wave’. Statistics Paper Series No. 2, April 2013. 2 Data sourced from ECB (2013), ‘The Eurosystem Household Finance and Consumption Survey: Results from the First Wave’. Statistics Paper Series No. 2, April 2013. 3 Jackson, P.D. and O’Donnell, A.T. (1985). The effects of stamp duty on equity transactions and prices in the UK stock exchange, Bank of England Discussion Paper, No. 25. 4 Umlauf, S. (1993). Transaction taxes and the behaviour of the
12 For debt –see also London Economics (2013), The Impact of a Financial Transaction Tax on Corporate and Sovereign Debt, Report prepared for the International Regulatory Strategy Group (IRSG), TheCityUK and City of London, April. 13 For equities – see Clifford Chance (2013), ‘Financial Transactions Tax: Update’, available at: http://www. cliffordchance.com/publicationviews/publications/2011/10/ financial_transactiontaxupdate.html 14 Sousa, Ricardo (2009). ‘Wealth Effects on Consumption,
Swedish stock market, Journal of Financial Economics, 33, pp.
Evidence from the Euro Area’. ECB Working Paper No. 1050/
227-40.
May 2009; and Ludwig and Sløk (2001), ‘Impact of Stock Prices
5 Saporta, V. and Kan, K. (1997). The effects of stamp duty on the level of volatility of UK equity prices, Bank of England Working Paper No. 74. 6 Oxera (2007) Stamp duty: its impact and the benefits of
and House Prices on Consumption in OECD Countries’, IMF Working Paper No. 1. 15 EFAMA (2011) ‘EFAMA’s comments on the Commission’s proposal for a Council Directive on a common system of
its abolition, Report prepared for the ABI, City of London
financial transaction tax’, available at http://www.efama.
Corporation, IMA and London Stock Exchange, May.
org/Publications/Public/FTT/11-4071_EFAMA%20submission%20
7 Best, M.C. and Kleven, H.J. (2013) Housing market responses to
on%20Commission%20proposals%20on%20FTT.pdf
transaction taxes: evidence from notches and stimulus in the
16 http://www.cityoflondon.gov.uk/business/economic-
UK. Mimeo. 8 See Eurostat, European sector accounts, http://epp.eurostat. ec.europa.eu/portal/page/portal/sector_accounts/data/ database. 9 The IMF data is available at http://cpis.imf.org/. 10 The information was sourced either from the annual statistics published by FESE or from the statistics produced by the various stock exchanges.
8
11 Provider of online marketplaces for fixed income.
research-and-information/research-publications/Documents/ research-2013/Impact-of-FTT-on-corporate-and-sovereigndebt-Final-PDF.pdf
SPECIAL INTEREST PAPER CITY OF LONDON CORPORATION
The Effects of a Financial Transaction Tax on European Households’ Savings SPECIAL INTEREST PAPER CITY OF LONDON CORPORATION FEBRUARY 2014
EXECUTIVE SUMMARY
www.cityoflondon.gov.uk/economicresearch