1. Philip Arestis, University of Cambridge, UK, and University of the Basque Country, Spain Malcolm Sawyer, University of Leeds, UK The Financial Transactions Tax: Its Potential and Feasibility

2. 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 3. Advantages of FTT 4. Disadvantages of FTT 5.

3. Presentation 4. Implementation and Feasibility of the Financial Transactions Tax 5. Concluding Remarks

4. 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);

5. 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.

6. Recent Financial Transactions Tax Contributions More recently the European Parliament voted, 7 th of March 2011, to support an EU- wide 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;

7. 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);

8. Recent Financial Transactions Tax Contributions Rationale of proposals Objectives Tax raising and use of revenue Volume of transactions Volatility Resource use Feasability

9. 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;

10. 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.

11. 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.

12. 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;

13. 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.

14. 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;

15. 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;

16. 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).

17. 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;

18. 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.

19. 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.

20. 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.

21. 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;

22. 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;

23. 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.

24. 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;

25. 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;

26. 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;

27. 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 co- operation 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.

28. 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;

29. 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;

30. 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;

31. 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;

32. 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.

33. 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;

34. 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.