Transcript Slide 1

The Financial Transactions Tax:
Its Potential and Feasibility
Philip Arestis, University of Cambridge, UK, and
University of the Basque Country, Spain
Malcolm Sawyer, University of Leeds, UK
Presentation
1. Introduction
2. Recent Financial Transactions Tax Contributions
3. Effects of Financial Transactions Tax
3.1 Volume of Transactions
3.2 Tax Revenue Potential
3.3 International Trade
3.4 National Economic Autonomy
3.5 Aggregate Demand
3.6 Efficiency of Markets
Presentation
4. Implementation and Feasibility of the
Financial Transactions Tax
5. Concluding Remarks
Introduction
 Keynes (1930, 1936) suggests that a tax on
foreign lending to contain speculative capital
movements might be necessary;
 In fact Keynes (1936) goes further and
suggests that “The introduction of a
substantial Government transfer tax on all
transactions might prove the most
serviceable reform available, with a view to
mitigating the predominance of speculation
over enterprise” (p. 160);
Introduction
 Tobin
(1974), proposed a Financial
Transactions Tax (FTT) as a way of reducing
short-term speculative currency flows, which
should tame exchange rate volatility, limit
speculation and raise tax revenues;
 More recently, support of the FTT is more
general and is based on two goals: reducing
financial market risk and potentially
preventing asset price bubbles; and raising
revenue for the government from the financial
sector, which can be used to meet the cost of
financial crises.
Recent Financial Transactions
Tax Contributions
 More recently the European Parliament
voted, 7th of March 2011, to support an EUwide financial package to be introduced after
2014;
 Such a FTT would be levied at 0.1 percent on
share and bond transactions, and 0.01
percent on complex security deals such as
derivative contracts;
Recent Financial Transactions Tax
Contributions
 Also, France has proposed to implement
unilaterally a FTT in the hope that this would
provide a ‘shock’ that would persuade other
countries in Europe to follow suit. It is to be
introduced in August 2012 in the form of a
stamp duty (tax on shares);
Recent Financial Transactions Tax
Contributions
 Rationale of proposals
 Objectives
 Tax raising and use of revenue
 Volume of transactions
 Volatility
 Resource use
 Feasability
Effects of FTT
 A number of effects can be identified
 Volume of Transactions
 In general, FTTs have been proposed not
only in the realization that the volume of
relevant financial transactions would be
reduced but also that such a reduction would
be part of the rationale for such taxes;
Effects of FTT
 The reduction in transactions is viewed to
have beneficial effects, in terms of both
foreign exchange and equity transactions;
 Also in the volatility of prices, in the volume of
assets and liabilities traded,
 More generally in the resources employed in
arranging such transactions.
Effects of FTT
 The experience prior to the ‘great recession’
in terms of the growth of trading between
financial institutions, traditional banks and the
‘shadow banking’ sector, which led to the
creation of the structured assets and the
financial crisis of August 2007, is relevant .
Effects of FTT
 Tax Revenue Potential
 This proposition has become particularly
popular recently in view of the fact that the
financial sector is relatively undertaxed;
 Financial transactions do not usually bear
general sales or value added taxes nor are
they usually subject to specific taxes in the
way in which, for example, tobacco and
alcohol are;
Effects of FTT
 In terms of the ‘great recession’, the relevant
goal is to raise revenue from the financial
sector to help meet the costs of the financial
crisis associated with the ‘great recession’ or
similar crises;
 There is of course the associated goal of
reducing financial market risk and help to
prevent asset price bubbles.
Effects of FTT
 International Trade Effects
 An exchange FTT would tax bona fide
currency transactions that finance
international trade in goods and services.
This is the case since such a tax cannot
distinguish between speculative transactions
and those to finance trade;
Effects of FTT
 International Trade Effects
 Such a tax might actually increase trade; to
the extent that it reduces currency market
uncertainty, foreign currency risk exposure is
reduced along with the cost of trading;
Effects of FTT
 In evaluating the overall effects of a FTT on
international trade, the general calculation is
that the foreign exchange flows are of the
order of 60 times those that would be
necessary for financing international trade;
 We would infer that even after the imposition
of a FTT, foreign exchange flows would
remain significantly in excess of those
required to finance trade (perhaps of the
order of 30 times).
Effects of FTT
 National Economic Autonomy
 FTT by reducing foreign exchange-rate
volatility increases the independence of
policy-makers. The famous ‘impossible trinity’
may be invoked to make this point;
 This is that out of the three objectives of
freedom of capital movements, exchange rate
stability and monetary policy autonomy, a
country can only meet two of them;
Effects of FTT
 Thus, for a country seeking exchange rate
stability, a FTT might help to restore some
measure of monetary policy autonomy;
 Thereby widening the scope in, for example,
the determination of domestic interest rates
that would fit in a better way with the needs of
the domestic economy than otherwise.
Effects of FTT
 Aggregate Demand Effects
 FTT could have expansionary effects. It could
increase aggregate demand via consumption
to the extent that the revenue from FTT is
redistributed to lower income groups with
higher marginal propensity to consume than
the higher income groups;
 Furthermore, the FTT revenue could help
fiscal consolidation in view of many countries
high fiscal deficits and government debt.
Effects of FTT
 A further impact of a FTT could be that the
increase of tax revenues is used to finance
public investment, thereby increasing
aggregate demand in the short run and
aggregate supply in the long run;
 Also important, and in terms of the ‘great
recession’, is the argument that to the extent
FTT reduces systemic risk and, thus, the
probability of future crises, it would lead to
higher long-term growth.
Effects of FTT
 Efficiency of Markets
 There is an increasing realisation that
financial markets do not operate in as an
efficient manner as portrayed in, for example,
the rational expectations literature;
 It is recognized that financial markets suffer
from asymmetric information, herd behaviour,
and moral hazard when participants are too
big or powerful to fail;
Effects of FTT
 The experience prior to the ‘great recession’
and the events leading to it clearly testify to
the problems that belief in such extreme and
wrong assumptions can create;
 An important implication of all these
problematic assumptions is persistent
misalignments and unstable exchange rate
regimes in the case of foreign exchange
markets;
Effects of FTT
 Asymmetric information and herd behaviour
imply that incompletely informed investors
suffer bouts of optimism and pessimism;
 There is, also, the argument that foreign
exchange market speculators watch other
speculators rather than ‘fundamentals’;
 Intervention and regulation thereby becomes
paramount.
Implementation of the Financial
Transactions Tax
 There is widespread agreement that the FTT
would have to be implemented on a properly
co-ordinated international basis;
 It may not be necessary for a full agreement
over the tax rate, though there would be
strong pressures towards a degree of
uniformity;
 However, there is the requirement for a
minimum rate to avoid competitive
undercutting of the tax rate;
Implementation of the Financial
Transactions Tax
 Most advocates of the FTT recognize that it
would have to be ‘universal and uniform’;
 This requirement may well be the most
important practical obstacle to the
implementation of such a tax;
 Still there is the argument that in view of the
fact that currency is highly concentrated, a
FTT imposition would not have to be
universal;
Implementation of the Financial
Transactions Tax
 Taxes also face the problem of evasion. In
the context of FTTs we would suggest that
issues of avoidance are likely to be
significant;
 We would include under this heading the
shifting of the location of the transaction from
one jurisdiction to another where the tax rate
on the transaction concerned is lower in the
latter jurisdiction (including a zero rate) than
in the former jurisdiction;
Implementation ility of the
Financial Transactions Tax
 Given the IMF’s considerable expertise in
international financial markets, it would be in
a good position to undertake such a task;
 Also in view of the IMF’s central objectives of
the promotion of international monetary cooperation to maintain exchange rate stability,
and orderly exchange arrangements amongst
its members, substantially strengthens the
argument that the IMF should play a central
role in its implementation.
Implementation of the Financial
Transactions Tax
 Whilst it is recognized that the tax could not
be implemented in one country, the question
does arise as to whether it would have to be
universal in order to be effective;
 In principle the answer is positive;
 However, there may be ways of avoiding a
shift of transactions to ‘tax havens’;
 one possibility is to consider the transfer of
funds to or from such location as taxable
transactions at penalty rates;
Implementation of the Financial
Transactions Tax
 For example, the movement of say £1 million
in sterling from the UK (assumed to be
applying the tax) to a ‘tax haven’ (not
applying the tax) would be subject to tax at a
multiple of the FTT. Another possibility would
be to tax at the site where the deal is made
rather than at the site where the transactions
occur;
 Still, there are countries around the world that
tax individually, which work very well;
Implementation of the Financial
Transactions Tax
 The best example is the stamp duty tax in the
case of the UK, where it is already in place in
the form of a levy of 0.5 percent on stocks
traded (that is on equities, active derivatives
and fixed-income markets), ever since 1694,
paid by residents and non-residents
 And London’s financial sector is truly
international;
Implementation of the Financial
Transactions Tax
 New research by the think-tank Z/Yen Group,
and reported in the Financial Times, “London
stays top of finance league” (19 March 2012),
clearly shows that London is the leading
‘global financial centre’, followed by New York
and Hong Kong.
 The UK’s Stock Exchange is in fact the fourth
largest in the world; it is estimated that 40
percent of the UK stamp duty on equities is
paid by non-UK residents;
Implementation of the Financial
Transactions Tax
 In fact, the administrative cost of collecting
this tax is lower than any other tax;
 Almost half of the $23bn of the revenue
raised annually by seven countries in the
world that impose this tax (Hong Kong, India,
South Korea, South Africa, Switzerland,
Taiwan, UK), is raised by the UK and South
Korea.
Concluding Remarks
 Our analysis clearly suggests that the FFT is
feasible;
 It would raise funds and reduce the volume of
currency transactions, diminish the volatility of
exchange markets, with significant resource
savings;
 Its introduction would face political problems
and its implementation would need to be
carefully arranged;
Concluding Remarks
 Although its introduction would face political
problems, it has been gaining popularity,
including the Commission of the EU;
 We have argued that although universality is
important it need not be so;
 It might be more appropriate to use the FTT
as one of several policy instruments to
combat speculation on the world’s financial
markets, and to finance development.