A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.
This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers.[1] However, it is not a taxing of the financial institutions themselves. Instead, it is charged only on the specific transactions that are designated as taxable. If an institution never carries out the taxable transaction, then it will never be taxed on that transaction.[2] Furthermore, if it carries out only one such transaction, then it will only be taxed for that one transaction. As such, this tax is neither a financial activities tax, nor a "bank tax,"[3] for example. This clarification is important in discussions about using a financial transaction tax as a tool to selectively discourage excessive speculation without discouraging any other activity (as John Maynard Keynes originally envisioned it in 1936).[4]
There are several types of financial transaction taxes. Each has its own purpose. Some have been implemented, and some remain unimplemented concepts. Concepts are found in various organizations and regions around the world. Some are domestic and meant to be used within one nation; whereas some are multinational.[5]
Contents |
The year 1694 saw an early implementation of a financial transaction tax in the form of stamp duty at the London Stock Exchange. The tax was payable by the buyer of shares for the official stamp on the legal document needed to ratify the purchase. As of 2011[update] it is the oldest tax still in existence in Great Britain.[6] In 1936, in the wake of the Great Depression, John Maynard Keynes advocated the wider use of financial transaction taxes.[4][7] He proposed the levying of a small transaction tax on dealings on Wall Street, in the United States, where (he argued) excessive speculation by uninformed financial traders increased volatility. (See Keynes financial transaction tax below) In 1972 the Bretton Woods system for stabilizing currencies effectively came to an end. In that context James Tobin (influenced by the work of Keynes) suggested his more specific "currency transaction tax" for stabilizing currencies on a larger, global, scale.[8] In December, 1994, the economic crisis in Mexico hurt its currency. In that context, Paul Bernd Spahn re-examined the Tobin tax, opposed its original form, and instead proposed his own version in 1995.[9][10] In the context of the financial crisis of 2007–2010, many economists, governments, and organizations around the world re-examined, or were asked to re-examine, the concept of a financial transaction tax, or its various forms. As a result various new forms of financial transaction taxes were proposed, such as the EU financial transaction tax (see below).
Although every financial transaction tax (FTT) proposal has its own specific intended purpose, there are some general intended purposes which are common to most of them. Below are some of those general commonalities. (Note: The intended purpose may or may not be achieved.)
In 1936, when Keynes first proposed a financial transaction tax, he wrote, "Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation."[11] Rescuing enterprise from becoming "the bubble on a whirlpool of speculation" was also an intended purpose of the 1972 Tobin tax,[12][13][14][15][16][17] and is a common theme in several other types of financial transaction taxes. For the specific type of volatility in specific areas, see each specific type of financial transaction taxes below. (One exception: This "curbing of volatility" is probably not the intended purpose of the "bank transaction tax".)
Another common theme is the proposed intention to create a system of more fair and equitable tax collection. This aspect is aimed at taxing the financial sector. In the context of the financial crisis of 2007–2010, many economists, governments, and organizations around the world re-examined, or were asked to re-examine, the concept of a financial transaction tax, or its various forms. On April 16, 2010, in response to a request from the G20 nations, the IMF report was entitled, "A Fair and Substantial Contribution by the Financial Sector" which made reference to a financial transaction tax as one of several options.[18][19]
According to several leading figures, the "fairness" aspect of a financial transaction tax has eclipsed, and/or replaced, "prevention of volatility" as the most important purpose for the tax. Fraser Reilly-King of Halifax Initiative is one such economist.[20] He proposes that an FTT would not have addressed the root causes of the United States housing bubble which, in part, triggered the financial crisis of 2007–2010. Nevertheless, he sees the FTT as important to bring balance to the taxation of all parts of the economy more equitably.[20]
According to some economists, a financial transaction tax is less susceptible to tax avoidance and tax evasion than other types of taxes proposed for the financial sector. On Oct 5, 2009, Joseph Stiglitz, affirmed this "technical feasibility" of the tax: Although Tobin had said his own tax idea was unfeasible in practice, Joseph Stiglitz, former Senior Vice President and Chief Economist of the World Bank that modern technology meant that was no longer the case. Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted.[21] Fraser Reilly-King of Halifax Initiative also points out that "the key issue" and advantage of an FTT is its relatively superior functional ability to prevent tax evasion in the financial sector.[22] Economist Rodney Schmidt, Principal Researcher of The North-South Institute, also concurred that a financial transaction tax is more technically feasible than the "bank tax" proposed by the IMF on April 16, 2010.[23]
The "technical feasibility" is not so much a "reason for the tax," but rather a "reason for governments to select this type of tax above other types of taxes" if they intend to tax the financial sector.
Transaction taxes can be raised on the sale of specific financial assets (such as stock, bonds or futures); can be applied to currency exchange transactions; or can be general taxes levied against a mix of different transactions.[4]
Among the first proponents of a financial transaction tax was John Maynard Keynes, who first proposed his version in 1936.[4] He proposed that a small transaction tax should be levied on dealings on Wall Street, in the United States, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes, the key issue was the proportion of ‘speculators’ in the market, and his concern that, if left unchecked, these types of players would become too dominant.[4] Keynes writes: "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 in the United States. (1936:159-60)"[4]
A currency transaction tax is a tax placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. The most frequently discussed versions of a currency transaction tax are the Tobin tax and Spahn tax.
In 1972 the economist James Tobin proposed a tax on all spot conversions of one currency into another. The so-called Tobin tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system effectively ended.[8] In 2001, James Tobin looked back at the 1994 economic crisis in Mexico, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis, and said: "[My proposed] tax [idea] on foreign exchange transactions... dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, South East Asia and Russia have proven....[12][13][14][15][16]
Paul Bernd Spahn opposed the original form of a Tobin Tax in a Working Paper International Financial Flows and Transactions Taxes: Survey and Options, concluding "...the original Tobin tax is not viable. First, it is virtually impossible to distinguish between normal liquidity trading and speculative noise trading. If the tax is generally applied at high rates, it will severely impair financial operations and create international liquidity problems, especially if derivatives are taxed as well."[9][10] However, on 16 June 1995 Spahn suggested that "Most of the difficulties of the Tobin tax could be resolved, possibly with a two-tier rate structure consisting of a low-rate financial transactions tax and an exchange surcharge at prohibitive rates."[9][10] This new form of tax, the Spahn tax, was later approved by the Belgian Federal Parliament in 2004.[24]
On September 19, 2001, retired speculator George Soros put forward a proposal, issuing Special Drawing Rights (SDR) that the rich countries would pledge for the purpose of providing international assistance and the alleviation of poverty and other approved objectives. According to Soros this could make a substantial amount of money available almost immediately. In 1997, IMF member governments agreed to a one-time special allocation of SDRs, totaling approximately $27.5 billion. This is slightly less than 0.1% of the global GDP. Members having 71% of the total vote needed for implementation have already ratified the decision. All it needs is the approval of the United States Congress. If the scheme is successfully tested, it could be followed by an annual issue of SDRs and the amounts could be scaled up "so that they could have a meaningful impact on many of our most pressing social issues".[25]
As globalization eroded the efficiency of conventional taxes such as value added taxes, various Latin American countries applied a new form of taxation levied on bank transactions. Argentina introduced a bank transaction tax in 1984 before it was abolished in 1992. Shortly after in 1993, Brazil implemented its own version called "CPMF", which lasted until 2007. The broad based tax levied on all debit (and/or credit) entries on bank accounts proved to be evasion-proof, more efficient and less costly than orthodox tax models. Furthermore, the significant revenue-raising capacity of bank transactions taxation revived the centuries old ideal of the Single Tax. In his book, Bank transactions: pathway to the single tax ideal, Marcos Cintra carries out a qualitative and quantitative in-depth comparison of the efficiency, equity and compliance costs of a bank transactions tax relative to orthodox tax systems, and opens new perspectives for the use of modern banking technology in tax reform across the world.[26]
A stamp duty was introduced in the United Kingdom as an ad valorem tax on share purchases in 1808.[27] Stamp duties are collected on documents used to effect the sale and transfer of certificated stock and other securities of UK based companies.[28]
To address the development of trades in uncertificated stock, the UK created the Finance Act 1986, which introduced the Stamp Duty Reserve Tax (SDRT) at a rate of 0.5% on share purchases.[29] It is charged whether the transaction takes place in the UK or overseas, and whether either party is resident of the UK or not. Securities issued by companies overseas are not taxed. This means that - just like the standard stamp duty - the tax is paid by foreign and UK-based investors who invest in UK incorporated companies. In other words, the tax applies to all companies, which are headquartered in the UK,[28] albeit there is a relief for intermediaries (such as market makers and large banks that are members of a qualifying exchange).[30]
Both stamp duty and SDRT remain in place today, albeit with continual relief for intermediaries, so that over 70% of transactions are exempt from tax.[4] SDRT accounts for the majority of revenue collected on share transactions effected through the UK's Exchanges. On average almost 90% of revenues stem from the SDRT. Only a minor part comes from the standard stamp duty.[28] Revenue is pro-cyclical with economic activity. In terms of GDP and total tax revenue the highest values have been reached during the dot.com boom years at the end 20th century, notably in 2000-01. In 2007-08 the SDRT generated €5.37 billion in revenue (compared to 0.72 billion of the standard stamp duty). This accounts for 0.82% over total UK tax revenue or 0.30% of GDP. In 2008-09 the figure dropped to €3.67 billion (0.22% of GDP), due to reduced share prices and trading volumes as a result of the financial crisis.[28]
The US imposed a financial transaction tax from 1914 to 1966. The federal tax on stock sales of 0.1 per cent at issuance and 0.04 per cent on transfers. Currently, the US has a very minor 0.0034 per cent tax which is levied on stock transactions. The tax, known as Section 31 fee, is used to support the operation costs of the Securities and Exchange Commission (SEC). In 1998, the federal government collected $1.8 billion in revenue from these fees, almost five times the annual operating costs of the SEC.[31]
Till 1999, Japan imposed a transaction tax on a variety of financial instruments, including debt instruments and equity instruments, but at differential rates. The tax rates were higher on equities than on debentures and bonds. In the late 1980s, the Japanese government was generating significant revenues of about $12 billion per year. The tax was eventually withdrawn as part of “big bang” liberalization of the financial sector in 1999.[31]
In January, 1984, Sweden introduced a 0.5% tax on the purchase or sale of an equity security. Hence a round trip (purchase and sale) transaction resulted in a 1% tax. In July, 1986, the rate was doubled, and in January, 1989, a considerably lower tax of 0.002% on fixed-income securities was introduced for a security with a maturity of 90 days or less. On a bond with a maturity of five years or more, the tax was 0.003%. Analyst Marion G. Wrobel prepared a paper for Canadian Government in July, 2006, examining the international experience with financial transaction taxes, and paying particular attention to the Swedish experience.[32]
The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kroner per year. They did not amount to more than 80 million Swedish kroner in any year and the average was closer to 50 million.[33] In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kroner by 1988.[34]
On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.
Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.[32]
In 1998 Colombia introduced a financial transaction tax of 0.2%,[35] covering all financial transactions including banknotes, promissory notes, processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means, bank drafts and bank cheques, money on term deposit, overdrafts, installment loans, documentary and standby letters of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures, safekeeping of documents and other items in safe deposit boxes, currency exchange, sale, distribution or brokerage, with or without advice, unit trusts and similar financial products.
In 2003 the Peruvian government introduced a 0.1% general financial transaction tax, with the aim of raising finance for the education sector.[4]
Since 1 October 2004 India levies financial transaction taxes of up to 0.125% payable on the value of taxable securities transaction made through a recognized national stock exchange. The securities transaction tax (STT) is not applicable on off-market transactions. The tax rate is set at 0.125% on a delivery-based buy and sell, 0.025% on non delivery-based transactions, and 0.017% on Futures and Options transactions. The tax has been criticized by the Indian financial sector and is currently under review.[36]
The Belgium securities tax applies to certain transactions concluded or executed in Belgium through a Belgian professional intermediary, to the extent that they relate to public funds, irrespective of their (Belgian or foreign) origin. The "tax on stock exchange transactions" is not due upon subscription of new securities (primary market transactions). Both buyers and sellers are subject to the tax. The tax rate varies in accordance with the type of transactions. A 0.07% tax (subject to a maximum of €500 per transaction) is charged for distributing shares of investment companies, certificates of contractual investment funds, bonds of the Belgian public debt or the public debt of foreign states, nominative or bearer bonds, certificates of bonds, etc. A 0.5% tax (subject to a maximum of €750 per transaction) is charged for accumulating shares of investment companies and 0.17% (subject to a maximum of €500 per transaction) for any other securities (such as shares). Transactions made for its own account by non-resident taxpayers and by some financial institutions, such as banks, insurance companies, organizations for financing pensions (OFPs) or collective investment are exempted from the tax.[28]
Finland imposes a tax of 1.6% on the transfer of certain Finnish securities, mainly equities such as bonds, debt securities and derivatives. The tax is charged if the transferee and/or transferor is a Finnish resident or a Finnish branch of certain financial institutions. However, there are several exceptions. E.g. no transfer tax is payable if the equities in question are subject to trading on a qualifying market.[28]
Greece applies a transaction duty on the sale of Greek listed shares at a rate of 0.15% (0.2% as of 1.4.2011). This tax applies to traded financial instruments treated as compound products (equity swaps, call options, futures). The transaction duty, which burdens the seller of the listed shares, is directly withheld upon each settlement of the transaction and paid by the Stock Exchange Depository SA to the competent tax authorities. Greek transaction duty also applies on the sale of foreign listed shares by Greek tax payers (i.e. Greek resident individuals, Greek enterprises and Greek branches of foreign entities).[28]
Poland charges a 1% Civil Law Activities Tax (CLAT) on the sale or exchange of property rights, which includes securities and derivatives. The tax applies to transactions, which are performed in Poland or which grant property rights that are to be exercised in Poland. It also applies to transactions executed outside Poland if the buyer is established in Poland. Polish treasury bonds and Polish treasury bills, bills issued by the National Bank and some other specified securities are exempted from the tax.[28]
Singapore charges a 0.2% stamp duty payable on all instruments that give effect to transactions in stocks and shares. Generally, there is no stamp duty payable for derivatives instruments. Share transactions carried out on the Singapore Exchange via the scripless settlement system do not attract duty, as there is no instrument of transfer.[28]
In Switzerland a transfer tax (Umsatzabgabe) is levied on the transfer of domestic or foreign securities such as bonds and shares, where one of the parties or intermediaries is a Swiss security broker. Other securities such as options futures, etc. do not qualify as taxable securities. Swiss brokers include banks and bank-linked financial institutions. The duty is levied at a rate of 0.15% for domestic securities and 0.3% for foreign securities. However, there are numerous exemptions to the Swiss transfer tax. These are among others: Eurobonds, other bonds denominated in a foreign currency and the trading stock of professional security brokers. The revenue of the Swiss transfer tax was CHF 1.9 billion in 2007 or 0.37% of GDP.[28]
In Taiwan the securities transaction tax (STT) is imposed upon gross sales price of securities transferred and at a rate of 0.3% for share certificates issued by companies and 0.1% for corporate bonds or any securities offered to the public which have been duly approved by the government.[28] However, trading of corporate bonds and financial bonds issued by Taiwanese issuers or companies are temporarily exempt from STT beginning 1 January 2010. The Taiwanese government argued this "would enliven the bond market and enhance the international competitiveness of Taiwan’s enterprises."[37]
Since 1998, Taiwan also levies a stock index futures transaction tax imposed on both parties. The current transaction tax is levied per transaction at a rate of not less than 0.01% and not more than 0.06%, based on the value of the futures contract. Revenue from the securities transaction tax and the futures transaction tax was about €2.4 billion in 2009. The major part of this revenue came from the taxation of bonds and stocks (96.5%). The taxation of stock index future shares was 3.5%. In total, this corresponds to 0.8% in terms of GDP.[28]
In 2000, a representative of a “pro Tobin tax” NGO proposed the following: "In the face of increasing income disparity and social inequity, the Tobin Tax represents a rare opportunity to capture the enormous wealth of an untaxed sector and redirect it towards the public good. Conservative estimates show the tax could yield from $150-300 billion annually. The UN estimates that the cost of wiping out the worst forms of poverty and environmental destruction globally would be around $225 billion per year."[38] According to Dr. Stephen Spratt, "the revenues raised could be used for....international development objectives...such as meeting the [ Millennium Development Goals ]."[4] These are eight international development goals that 192 United Nations member states and at least 23 international organizations have agreed (in 2000) to achieve by the year 2015. They include reducing extreme poverty, reducing child mortality rates, fighting disease epidemics such as AIDS, and developing a global partnership for development.[39]
At the UN September 2001 World Conference against Racism, when the issue of compensation for colonialism and slavery arose in the agenda, Fidel Castro, the President of Cuba, advocated the Tobin Tax to address that issue. (According to Cliff Kincaid, Castro advocated it "specifically in order to generate U.S. financial reparations to the rest of the world," however a closer reading of Castro's speech shows that he never did mention "the rest of the world" as being recipients of revenue.) Castro cited holocaust reparations as a previously established precedent for the concept of reparations.[40][41] Castro also suggested that the United Nations be the administrator of this tax, stating the following:
"May the tax suggested by Nobel Prize Laureate James Tobin be imposed in a reasonable and effective way on the current speculative operations accounting for trillions of US dollars every 24 hours, then the United Nations, which cannot go on depending on meager, inadequate, and belated donations and charities, will have one trillion US dollars annually to save and develop the world. Given the seriousness and urgency of the existing problems, which have become a real hazard for the very survival of our species on the planet, that is what would actually be needed before it is too late."[40]
On March 6, 2006, US Congressman Dr Ron Paul stated the following: "The United Nations remains determined to rob from wealthy countries and, after taking a big cut for itself, send what’s left to the poor countries. Of course, most of this money will go to the very dictators whose reckless policies have impoverished their citizens. The UN global tax plan...resurrects the long-held dream of the 'Tobin Tax'. A dangerous precedent would be set, however: the idea that the UN possesses legitimate taxing authority to fund its operations."[42]
On 3 December 2009, U.S. Representative Peter Anthony DeFazio of Oregon proposed the Let Wall Street Pay for the Restoration of Main Street Bill which includes a tax on US financial market securities transactions.[5] The bill suggests to tax stock transactions at a rate of 0.25 percent. The tax on futures contracts to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price would be 0.02 percent. Swaps between two firms and credit default swaps would be taxed 0.02 percent.[43] The tax would only target speculators, since the tax would be refunded to average investors, pension funds and health savings accounts.[44] Projected annual revenue is $150 billion per year, half of which would go towards deficit reduction and half of which would go towards job promotion activities.[5][43]
The day the bill was introduced, it had the support of 25 of DeFazio's House colleagues.[5] It has not yet passed.
On December 7, 2009 Nancy Pelosi, Speaker of the United States House of Representatives stated her support for a "G20 global tax."[45] The proposal, which was thought to raise new funding for poor countries failed to win the backing of the G20 at 2011 Cannes summit.[46] Nevertheless, France President Nicolas Sarkozy said he planned to still pursue the idea.[46]
According to Bill Gates, co-founder of Microsoft and a supporter of a G20 global FTT, even a small tax of 10 basis points on equities and 2 basis points on bonds could generate about $48 billion from G20 member states, or $9 billion if only adopted by larger European countries.[47]
On 15 February 2010 a coalition of 50 charities and civil society organisations launched a campaign for a Robin Hood tax on Financial transactions. The proposal would affect a wide range of asset classes including the purchase and sale of stocks, bonds, commodities, unit trusts, mutual funds, and derivatives such as futures and options.[48]
On June 28, 2010, the European Union's executive said it will study whether the European Union should go alone in imposing a tax on financial transactions after G20 leaders failed to agree on the issue. The following day the European Commission called for Tobin-style taxes on the EU's financial sector to generate direct revenue for the European Union starting from 2014. At the same time it suggested to reduce existing levies coming from the 27 member states.[49] On September 28, president of the European Commission Jose Barroso officially presented the plan of creating the new financial transactions tax, which Barroso claimed could raise 55 billion Euros per year.[50] The proposed EU-wide tax - 0.1% tax on bond and equity transactions, and 0.01% on derivative transactions between financial firms - should support European countries in crisis.[51]
Being faced with continuous resistance from some non-eurozone EU countries, advocates of the FTT such as the finance ministers from Germany, Austria and Belgium have called for implementation only within the 17-nation eurozone area, which would exclude reluctant governments like the United Kingdom and Sweden.[52][53] Opinion polls indicate that two thirds of British people are in favour of some forms of FTT (see section: Public opinion).
Proponents of the tax assert that it will reduce price volatility. In a 1984 paper, Lawrence Summers and Victoria Summers argued, “Such a tax would have the beneficial effects of curbing instability introduced by speculation, reducing the diversion of resources into the financial sector of the economy, and lengthening the horizons of corporate managers.”[54] It is further believed that FTTs “should reduce volatility by reducing the number of noise traders”.[55] However most empirical studies find that the relationship between FTT and short-term price volatility is ambiguous and that “higher transaction costs are associated with more, rather than less, volatility”.[55]
A 2003 IMF Staff Paper by Karl Habermeier and Andrei Kirilenko found that FTTs are “positively related to increased volatility and lower volume.”[56] A study of the Shanghai and Shenzhen stock exchanges says the FTT created “significant” increases in volatility because it “would influence not only noise traders, but also those informed traders who play the role of decreasing volatility in the stock market.”[57] A french study of 6,774 daily realized volatility measurements for 4.7 million trades in a four year period of index stocks trading in the Paris Bourse from 1995 to 1999 reached the same conclusion “that higher transaction costs increase stock return volatility.” The French study concluded that this volatility measures “are likely to underestimate the destabilizing role of security transactions since they – unlike large ticks – also reduce the stabilizing liquidity supply.”[58]
A study of the UK Stamp Duty in 1997 found no significant effect on the volatility of UK equity prices.[55]
In 2011 the IMF published a study paper, which argues that a securities transaction tax (STT) "reduces trading volume, it may decrease liquidity or, equivalently, may increase the price impact of trades, which will tend to heighten price volatility.”[59] A study by the think tank Oxera found that the imposition of the UK’s Stamp Duty would “likely have a negative effect on liquidity in secondary markets.” Regarding proposals to abolish the UK’s Stamp Duty, Oxera concluded that the abolition would “be likely to result in a non-negligible increase in liquidity, further reducing the cost of capital of UK listed companies.”[60] A study of the FTT in Chinese stock markets found liquidity reductions due to decreased transactions.[57]:6
An IMF Working Paper found a FTT impacts price discovery. The natural effect of the FTT’s reduction of trading volume is to reduce liquidity, which “can in turn slow price discovery, the process by which financial markets incorporate the effect of new information into asset prices.” The FTT would cause information to be incorporated more slowly into trades, creating “a greater autocorrelation of returns.” This pattern could impede the ability of the market to prevent asset bubbles. The deterrence of transactions could “slow the upswing of the asset cycle,” but it could also “slow a correction of prices toward their fundamental values.”[59] :16,18,21
Habermeier and Kirilenko conclude that “The presence of even very small transaction costs makes continuous rebalancing infinitely expensive. Therefore, valuable information can be held back from being incorporated into prices. As a result, prices can deviate from their full information values.”[56]:174 A Chinese study agrees, saying: “When it happens that an asset’s price is currently misleading and is inconsistent with its intrinsic value, it would take longer to correct for the discrepancy because of the lack of enough transactions. In these cases, the capital market becomes less efficient.”[57]:6
Revenues vary according to tax rate, transactions covered, and tax effects on transactions.
The Swedish experience with transaction taxes in 1984-91 demonstrates that the net effect on tax revenues can be difficult to estimate and can even be negative due to reduced trading volumes. Revenues from the transaction tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kroner per year but actually amounted to no more than 80 million Swedish kroner in any year. Reduced trading volumes also caused a reduction in capital gains tax revenue which entirely offset the transaction tax revenues.[34]
An examination of the scale and nature of the various payments and derivatives transactions and the likely elasticity of response led Honohan and Yoder (2010) to conclude that attempts to raise a significant percentage of gross domestic product in revenue from a broad-based financial transactions tax are likely to fail both by raising much less revenue than expected and by generating far-reaching changes in economic behavior. They point out that, although the side effects would include a sizable restructuring of financial sector activity, this would not occur in ways corrective of the particular forms of financial overtrading that were most conspicuous in contributing to the ongoing financial crisis. Accordingly, such taxes likely deliver both less revenue and less efficiency benefits than have sometimes been claimed by some. On the other hand, they observe that such taxes may be less damaging than feared by others.
On the other hand, the case of UK stamp duty reserve tax shows, that FTT can generate substantial revenues even if applied only within a single country. Despite the low tax rate of 0.5% on the purchase of shares, the UK managed to generate between €3.7 and €7.4 billion in revenues from stamp duties per year throughout the last decade.[28] Also the cases of Japan, Taiwan and Switzerland suggest that countries may generate sizable amounts of income by introducing FTT on a national scale. If implemented on an international scale, revenues may be even considerably higher, since it would make it more difficult for traders to avoid the tax by moving to other locations.[61]
According to a European Commission working paper, empirical studies show that the UK stamp duty influences the share prices negatively. More frequently traded shares are stronger affected than low-turnover shares. Therefore the tax revenue capitalizes at least to some extent in lower current share prices. For firms which rely on equity as marginal source of finance this may increase capital costs since the issue price of new shares would be lower than without the tax.[28]
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, and formerly Chief Economist at the IMF, argues that "Higher transactions taxes increase the cost of capital, ultimately lowering investment. With a lower capital stock, output would trend downward, reducing government revenues and substantially offsetting the direct gain from the tax. In the long run, wages would fall, and ordinary workers would end up bearing a significant share of the cost. More broadly, FTTs violate the general public-finance principle that it is inefficient to tax intermediate factors of production, particularly ones that are highly mobile and fluid in their response."[67]
An IMF Working Paper finds that the FTT “disproportionately burdens” the financial sector and will also impact pension funds, public corporations, international commerce firms, and the public sector, with “multiple layers of tax” creating a “cascading effect.” “[E]ven an apparently low-rate [FTT] might result in a high tax burden on some activities.” These costs could also be passed on to clients, including not only wealthy individuals and corporations, but charities and pension and mutual funds.[59]:25,37
Other studies have suggested that the financial transaction tax is regressive in application—particularly the Stamp Duty in the UK, which includes certain exemptions only available to institutional investors. One UK study, by the Institute for Development Studies, suggests, “In the long run, a significant proportion of the tax could end up being passed on to consumers.”[55]:3 Another study of the UK Stamp Duty found that institutional investors avoid the tax due to intermediary relief, while short-term investors who are willing to take on additional risk can avoid the tax by trading noncovered derivatives. The study concluded, therefore, “The tax is thus likely to fall most heavily on long-term, risk-averse investors.”[59]:36
Although James Tobin had said his own Tobin tax idea was unfeasible in practice, a study on its feasibility commissioned by the German government 2002 concluded that the tax was feasible even at a limited scale within the European time zone without significant tax evasion.[68] Joseph Stiglitz, former Senior Vice President and Chief Economist of the World Bank, said, on October 5, 2009, that modern technology meant that was no longer the case. Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted.[21]
However, on November 7, 2009, at the G20 finance ministers summit in Scotland, the head of the International Monetary Fund, Dominique Strauss-Khan, said, "transactions are very difficult to measure and so it's very easy to avoid a transaction tax."[69]
Nevertheless in early December 2009, economist Stephany Griffith-Jones agreed that the "greater centralisation and automisation of the exchanges' and banks' clearing and settlements systems ... makes avoidance of payment more difficult and less desirable."[70]
In January, 2010, feasibility of the tax was supported and clarified by researchers Rodney Schmidt, Stephan Schulmeister and Bruno Jetin who noted “it is technically easy to collect a financial tax from exchanges ... transactions taxes can be collected by the central counterparty at the point of the trade, or automatically in the clearing or settlement process."[71][72] (All large-value financial transactions go through three steps. First dealers agree to a trade; then the dealers’ banks match the two sides of the trade through an electronic central clearing system; and finally, the two individual financial instruments are transferred simultaneously to a central settlement system. Thus a tax can be collected at the few places where all trades are ultimately cleared or settled.)[72][73]
When presented with the problem of speculators shifting operations to offshore tax havens, a representative of a “pro Tobin tax” NGO argued as follows:
Agreement between nations could help avoid the relocation threat, particularly if the tax were charged at the site where dealers or banks are physically located or at the sites where payments are settled or ‘netted’. The relocation of Chase Manhattan Bank to an offshore site would be expensive, risky and highly unlikely – particularly to avoid a small tax. Globally, the move towards a centralized trading system means transactions are being tracked by fewer and fewer institutions. Hiding trades is becoming increasingly difficult. Transfers to tax havens like the Cayman Islands could be penalized at double the agreed rate or more. Citizens of participating countries would also be taxed regardless of where the transaction was carried out.[74]
There has been debate as to whether one single nation could unilaterally implement a financial transaction tax. In the year 2000, "eighty per cent of foreign-exchange trading [took] place in just seven cities. Agreement [to implement the tax] by [just three cities,] London, New York and Tokyo alone, would capture 58 per cent of speculative trading."[74] However, on June 27, 2010 at the 2010 G-20 Toronto summit, the G20 leaders declared that a "global tax" was no longer "on the table," but that individual countries will be able to decide whether to implement a levy against financial institutions to recoup billions of dollars in taxpayer-funded bailouts.[75] Economist Rodney Schmidt states:
"It is possible for a single country to apply a securities transaction tax unilaterally without significant capital flight to exchanges in other jurisdictions. There are many examples of such taxes already in existence. Britain levies a “Stamp Duty,” a 0.5% tax on purchases of shares of UK companies whether the transaction occurs in the UK or overseas. Such specific financial transaction taxes exist in Austria, Greece, Luxembourg, Poland, Portugal, Spain, Switzerland, Hong Kong, China and Singapore. The state of New York levies a stamp duty on trades taking place on both the New York Stock Exchange and on NASDAQ."[73]
A gradual implementation of FTT could start with Europe, where support is strongest. The first stage might involve a levy on financial instruments within a few countries.[73] Stephan Schulmeister of the Austrian Institute of Economic Research has suggested that initially Britain and Germany could implement a tax on a range of financial instruments since about 97% of all transactions on European Union exchanges occur in these two countries[73]
Over 1,000 economists (including Paul Krugman,[89] Jeffrey Sachs[90] and Nobel laureate Joseph Stiglitz[21]), more than 1,000 parliamentarians from over 30 countries,[91][92] the world's major labor leaders, ATTAC, Occupy Wall Street protesters, Oxfam, War on Want[93] and other major development groups, the World Wildlife Fund, Greenpeace[94] and other major environmental organizations support a FTT. Other notable supporters include the Archbishop of Canterbury, Bill Gates and Michael Moore.[88] David Harding, founder and CEO of one of London's biggest hedge funds has given qualified support for a European tax on financial transactions, breaking ranks with many of his peers fiercely opposed to such a measure.[95] Speculator George Soros, put forward a different proposal, calling rich countries to donate their Special Drawing Rights for the purpose of providing international assistance, without necessarily dismissing the Tobin tax idea.[25] It has been widely reported that the Pope backs such a tax. However, the reality is that a commission of the Vatican of which the Pope is not a member merely said that such a tax would be worth reflecting on. [96]
The European Commission has proposed a regional FTT to be implemented within the European Union (or the Eurozone) by 2014.[49]
According to Ron Suskind, the author of "Confidence Men", a book based on 700 hours of interviews with high-level staff of the US administration, President Obama supported a FTT on trades of stocks, derivatives, and other financial instruments, but it was blocked by Obama’s former director of the National Economic Council Larry Summers.[112]
Most hedge funds managers fiercely oppose FTT.[95] So does the economist and former member of Bank of England Charles Goodhart.[113] The Financial Times[114] and the Asia-Pacific Economic Cooperation Business Advisory Council have also spoken out against a global financial transaction tax.[115]
In 2001, the IMF conducted considerable research that opposes a transaction tax.[116] On 11 December 2009, the Financial Times reported "Since the Nov 7 [2009] summit of the G20 Finance Ministers, the head of the International Monetary Fund, Mr Strauss-Kahn seems to have softened his doubts, telling the CBI employers' conference: 'We have been asked by the G20 to look into financial sector taxes. ... This is an interesting issue. ... We will look at it from various angles and consider all proposals.'"[117] When the IMF presented its interim report[18][19] for the G20 on April 16, 2010, it laid out three options: a bank tax, a Financial Activities Tax (FAT), and a third option (which was not promoted but not ruled out), a financial transaction tax.[73] On 16 April 2011, the IMF stated, it does not endorse a financial transaction tax, believing it "does not appear well suited to the specific purposes set out in the mandate from the G-20 leaders."[18] However, it concedes that "The FTT should not be dismissed on grounds of administrative practicality".[18]
Challenging the IMF's belittling of the financial transaction tax, Stephan Schulmeister of the Austrian Institute of Economic Research found that, "the assertion of the IMF paper, that a financial transaction tax "is not focused on the core sources of financial instability," does not seem to have a solid foundation in the empirical evidence."[118]
A survey published by YouGov suggests that more than four out of five people in the UK, France, Germany, Spain and Italy think the financial sector has a responsibility to help repair the damage caused by the economic crisis.[119] A recent Eurobarometer poll of more than 27,000 people published in January 2011 found that Europeans are strongly in favour of a financial transaction tax by a margin of 61 to 26 per cent. Of those, more than 80 per cent agree that if global agreement cannot be reached - an FTT should, initially, be implemented in just the EU.[119][120]
2011 polls have suggested about two thirds of the British public support the Robin Hood tax campaign and a FTT.[119][121] The polls indicate strong support for a FTT among supporters of all the three main UK political parties.[119]