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Financial Transaction Taxes

FTT.jpg

The Economist is unequivocal: bin it. (Source: The Economist)

Ever since the financial crisis and the subsequent recession, the idea that a broad tax on financial transactions should be applied has enjoyed an intellectual resurgence. Initially, the economist James Tobin proposed a worldwide tax on spot conversions from one currency into another, back in 1972 [1].

In more contemporary times, there is the ‘Robin Hood Tax’ campaign in Britain. The European Union discussed the proposal to apply a financial transaction tax [2].

(Video: Robin Hood Tax)

In the United States, Senator Bernie Sanders (Independent, Vermont), who is seeking the Democrat nomination for presidency, has proposed a financial transaction to fund pre-paid university education for all students.

This is from Senator Sanders’ campaign website [3]:

The cost of this $75 billion a year plan is fully paid for by imposing a tax of a fraction of a percent on Wall Street speculators who nearly destroyed the economy seven years ago. More than 1,000 economists have endorsed a tax on Wall Street speculation and today some 40 countries throughout the world have imposed a similar tax including Britain, Germany, France, Switzerland, and China.

Stamp duty

This is somewhat misleading: Britain did not introduce such a levy in response to the 2008 financial crisis, and has had a stamp duty of various forms for over 300 years. Today, the stamp duty on the sale of shares is levied upon the total value of sales over £1,000: at a rate of 0.5%, rounded to the nearest £5 [4].

This tax has very low collection costs and typically raises between £3bn and £4bn per year [5].

After considering the empirical evidence of the British stamp duty on share prices, the Institute for Fiscal Studies concluded in a 2004 paper [6]:

We find that stamp duty clearly depresses share prices, particularly for firms with more frequently traded shares. This may increase the cost of capital faced by firms, which in turn could have negative repercussions on investment. Stamp duty also distorts the signals that share prices send about the profitability of forms, as share prices are also affected by expectations of future turnover volumes and stamp duty rates.

The case of British stamp duty should certainly be considered in wider debates about the merits of financial transaction taxes. The prospects of more tax revenue are often overwhelming. The Robin Hood Tax campaign video claimed the FTT would raise “more than £100bn”, which is more than 5% of British GDP.

Such claims about revenue are simply not what has happened when such taxes have been implemented, as the Brookings Institution concludes [7]:

The idea that an FTT can raise vast amounts of revenue — 1 percent of gross domestic product (GDP) or more — has proved inconsistent with actual experience with such taxes.

Cascades

Transaction taxes may end up have a deleterious impact on total tax revenue, because taxes on transactions multiply and cascade through the wider economy [8]. A single amount of money becomes taxed multiply times, meaning the effective tax rate stands well above the headline rate of the financial transaction tax.

The Brookings Institution notes [9]:

An FTT reduces asset prices, with the impact being the greatest for assets with high turnover rates. For such assets, even a small tax could significantly reduce value. An FTT would raise the cost of capital, with the effects again varying dramatically by holding period and tax rate and being the largest for high-turnover assets (Matheson 2012).

The European Commission, in its impact assessment, concluded that the proposed FTT would reduce economic growth within the European Union [10]:

The model used to analyse the macroeconomic impacts suggests that at 0.1%, a transaction tax on securities could, without the application of mitigating effects, reduce future GDP growth in the long run by 1.76% of GDP and of 0.17% at a rate of 0.01%. However, these results should be interpreted with caution given certain limitations of the underlying models.

At the higher rate of 0.1%, the Commission estimates the FTT in the EU would have revenues of €73.3bn and €433.9bn, between 0.60% to 3.54% of GDP. Previous financial transaction taxes have rarely exceeded 1% of the GDP when applied, so a reasonable conclusion is that this proposed tax would actually raise very little or no net revenue.

Whilst politicians and campaigners scurry around for more tax revenue, there is always the possibility of doing more harm than good.

References

[1] BBC, 2013. Q&A: What is the Tobin Tax on financial trading? Available from: http://www.bbc.co.uk/news/business-15552412 [Accessed: 3rd February 2016]

[2] Maurice, E., 2015. EU financial transaction tax on life support. EU Observer. Available from: https://euobserver.com/economic/131435 [Accessed: 3rd February 2016]

[3] Sanders, B., 2016. On the issues: It’s time to make college tuition free and debt free. Available from: https://berniesanders.com/issues/its-time-to-make-college-tuition-free-and-debt-free/ [Accessed: 3rd February 2016]

[4] GOV.UK, 2014. Stamp Duty on shares. Available from: https://www.gov.uk/guidance/stamp-duty-on-shares [Accessed: 3rd February 2016]

[5] HMRC, 2016. HMRC Tax and NIC receipts. Available from: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/493308/Dec15_Receipts_NS_Bulletin_Final.pdf [Accessed: 3rd February 2016]

[6] Bond, S., Hawkins, M., and Klemm, A., 2004. Stamp Duty on Shares and Its Effects on Share Prices. Institute for Fiscal Studies. Available from: http://www.ifs.org.uk/wps/wp0411.pdf [Accessed: 3rd February 2016]

[7] Tax Policy Center, 2015. Financial Transactions Taxes in Theory and Practice. Brookings Institution. Available from: http://www.brookings.edu/~/media/research/files/papers/2015/07/financial-tax-transactions/financial-transaction-taxes.pdf [Accessed: 3rd February 2016]

[8] Diamond, P. A., and Mirrlees, J. A., 1971. Optimal Taxation and Public Production II: Tax Rules. American Economic Review. Available from: https://www.aeaweb.org/aer/top20/61.3.261-278.pdf [Accessed: 3rd February 2016]

[9] Tax Policy Center, 2016. Financial Transactions Taxes: An Overview. Brookings Institution. Brookings Institution. Available from: http://www.taxpolicycenter.org/UploadedPDF/2000587-financial-transaction-taxes.pdf [Accessed: 3rd February 2016]

[10] European Commission, 2011. COM(2011) 594 – Executive Summary of the Impact Assessment. Available from: http://ec.europa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/summ_impact_assesmt_en.pdf [Accessed: 3rd February 2016]

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This entry was posted on March 8, 2016 by in National Politics and tagged , , , , .
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