Factsheet

The Financial Transaction Tax at a Glance

The taxation of financial transactions is back on the agenda. At the G20 summit inPittsburgh, French President and the GermanChancellor were opened the debate on a

Financial Transaction Tax

(FTT) in theG20. As a result, the IMF has been mandatedto prepare a report by June 2010 on options“

as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair thebanking system.”

Political momentum for the FTT

The US’s

Troubled Asset Relief Program

(TARP) - the $700 billion financial-bailout bill from 2008 - already contains a provisionto "

recoup

" from the financial-servicesindustry in case there is a shortfall in therepaying of money. During his electioncampaign Obama, too, said in aspeechinWisconsin on October 1, 2008:

“I've proposed a Financial Stability Fee on the financial services industry so Wall Street foots the bill -- not the American taxpayer.“

As well, members of the US House of Representatives are also considering an FTT.The EU parliament recently has spoken outin favour of the FTT and the

Leading Groupon Innovative Financing for Development

-some 40 countries from all continents - hasalready established an expert group which isworking out proposals to be submitted in allimportant international fora.In Europe, alongside Sarkozy and Merkel,the president of the European Commission,Barroso, and the head of the Britishsupervisory authority, Turner, have joinedthe bandwagon. France, Austria and Belgiumhave also in the past supported the taxationof currency transactions.This trend offers an extraordinaryopportunity for pressure from Civil Society, because Civil Society Organisations have been advocating for a decade for a tax oncurrency transactions of different types(

Tobin Tax

Spahn Tax, Solidarity Levy to Finance Development

).The costs of the bail-outs and the stimulus programs that amount to approx. 3,5 trillionUSD have lead to a tremendous increase in public debt. In the US net debt will doublefrom 42,3% of GDP in 2007 to 84,9% in2014. This is an increase of approx. 6 trillionUSD. In the UK, the debt burden will almosttriple from 38,3% to 91,8%, and in theeurozone it will increase from 56,2% to83,7%.

This will put extreme pressure ongovernment budgets, and there will beattempts to make citizens pay for the crashthrough cuts in social spending, environmentand other public goods. However, the entiredeficit can be paid for by appropriatetaxation on those who are responsible for thecrisis.

FTT - not the same as the Tobin Tax

In the recent discussion the FTT and theTobin tax have often been confused.However, there is a difference. Whereas theTobin proposal refers to currencytransactions (i.e. changing money from onecurrency to another) the FTT envisages amuch broader tax base. It would taxtransactions of all kinds of financial assets:shares, bonds, securities and derivatives.

The optimal solution is to tax all thesecategories of assets. However, it would be possible to tax just one or two categories.As the FTT is limited to asset markets, other transfers such s payments for goods or labour market transactions, as well asremittances and short-term inter-bank lending and any operations of the central banks, would not be subject to an FTT.

Unilateral implementation possible

Most politicians, who have recently

IMF, World Economic Outlook, October 2009

As long as these are traded at a stock exchange or another public institution and not bilaterally between financial actors (socalled trade “over the counter” i.e. without any control andsupervision). The G20 as well as the EU have declared, thattrade “over the counter” should be subject to control in thefuture, which would also allow to tax it easily.

supported the idea of an FTT have arguedthat such a tax would only work if it wereimplemented internationally. This is not true,as the existence of such taxes in severalcountries proves. The most prominentexample is the British “

Stamp Duty

.” This isa relatively high tax of 0,5% which is leviedon the nominal price of any purchase of shares of UK companies. This means that aforeign purchaser has to pay the tax. The taxis also levied on purchases of shares of British firms outside the UK. If the asset istransferred to a clearance service or converted to paper, which avoids the

Stamp Duty

, an "exit charge" of 1.5% has to be paid. The revenue in 2006 was approx. 5 billion euro. The duty has not lead to taxevasion and the weakening of the City of London. In fact, in big financialmarketplaces, actors benefit from network externalities (i.e. important partners in proximity, infrastructure etc.). As long as thetax rate does not exceed the costs of relocation, financial institutions would rather pay the tax than move to another location.Country specific financial transaction taxesexist in Austria, Greece, Luxembourg,Poland, Portugal, Spain, Switzerland, HongKong, China, Singapore. The US-state of New York levies a stamp duty on Wall Street(

New York Stock Exchange

and

NASDAQ

)on all firms based there, although at theextremely low rate of 0,003%.

Technical feasibility

Technically the FTT can be levied easily andat very low costs. All transactions at thestock exchanges are captured by electronic platforms. A simple electronic tag wouldautomatically transfer the tax to the relevanttax office. Avoidance is extremely unlikelysince circumventing the electronic platformswould be very costly.

Regulation or revenues – false opposites

The FTT would have, just like the TobinTax, a regulatory impact. It would reducespeculation and excessive liquidity. Thiswould contribute to greater stability of thefinancial system. In addition, with anappropriate tax rate, the revenues could beconsiderable. Both effects are welcome andshould not be viewed as contradictory.

Which tax rate and which revenues?

The tax rate should be as high as the British

Stamp Duty,

i.e. 0,5%. In respect of revenues, a tax rate of just 0,1% would yieldglobally 734,8 billion USD a year in ascenario where there would be a mediumreduction of transaction volumes resultingfrom the tax. At 0,1%, for Europe the figurewould be 321,3 bn. USD and for NorthAmerica, 313,6 bn. USD. In other words,with the revenues generated by the US alone,the above mentioned increase in public debt by 2014 could be paid for by the FTT withineight years. In Europe at an even shorter term.

What to use the revenues for?

As the tax is levied on asset markets, andsince these are highly concentrated in half adozen marketplaces, the bulk of the revenuewould accrue in particular countries, such asthe US, the UK, Japan, Switzerland,Germany, France and Singapore. They coulduse this revenue to reduce the public debtincurred in the management of the crisis.However, these few countries should not bethe only ones to benefit from the FTT. Theasset markets are international markets andhave caused damage to the whole world.Therefore, it is entirely legitimate that asubstantial proportion of the revenues – for instance one third - should go to aninternational fund under the auspices of theUN. A part of that money could bedistributed to the countries who had to bailout banks and create stimulus packages tomitigate the effects of the crisis but do nothave important asset markets.Another part should go to the financing of global common goods. In the first place, tocombat global warming as well as hunger and poverty in developing countries.In any case the precise distribution of therevenues should be fixed in a democratic process.

Literature:

Stephan Schulmeister, MargitSchratzenstaller, Oliver Picek (2008): A GeneralFinancial Transaction Tax Motives, Revenues, Feasibilityand Effects. Vienna.