A report from the City of London Corporation warns that the European Commission's proposed financial transaction tax (FTT) could see the cost of raising capital rise significantly for both governments and businesses across the continent.
The impact of a financial transaction tax on corporate and sovereign debt suggests that if FTT were in place today, the cost of issuing UK government debt would go up by £3.95bn, even though Britain is not among the 11 EU member states to sign up to the proposed directive in February.
Under proposals for the so-called 'Tobin tax' share and bond transactions will be taxed at a rate of 0.1%, and derivatives transactions at 0.01% from January 2014.
London Economics, the consultancy that researched the figures, say that other non-participating member states would face similar increases in their cost of capital, while the cost on those participating would potentially be even higher.
The costs of capital-raising would also increase significantly for businesses, the report says. Its analysis indicates firms in non-participating member states would be more severely affected - in the order of 100 basis points (bps) or more - because of the greater reliance they place on debt capital markets.
The report also argues that the FTT could also distort competition between financial instruments. It says the tax would have a greater negative impact on returns for corporate bonds from non-participating member states, while it would also hit returns on sovereign bonds harder than corporate bonds. Conversely, it would be smaller on returns for bonds with longer maturity.
Calling for the proposals to be reconsidered, Mark Boleat, policy chairman at the City of London Corporation, described the FTT as 'an ill-conceived idea that risks significantly damaging economic prospects across Europe'.
'Not only would it adversely affect the cost of sovereign debt but it would also make it more difficult for businesses across the continent to access funding. In reality, the FTT is likely to negatively affect end-users such as pension funds, while generating less revenue than estimated due to the behavioural change that would result,' Boleat said.
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