The Financial Transaction Tax: Has the Market Finally Met It’s Foe?

Billy VFollowing the Great Recession, many solutions have been put forward to “rein the markets in”, and try to plug the inequality that has been on the rise since. These have included rent controls, increased banking regulation, and efforts to harmonise corporate taxation and discourage international tax havens. Most are in agreement that the long term aim is “to create a financial system and an economy that works for all of our people, not just a handful of billionaires”. (Sanders, 2016) In this blog post, @ucdpolitics student, Billy Vaughan, argues that it is one thing to come up with convincing rhetoric, quite another to devise a detailed mechanism to tackle inequality, and in particular to shift the burden from capital to labour. Once such idea, however, is to introduce a Financial Transactions Tax, or FTT.

The idea of a FTT began when John Maynard Keynes proposed levying a small transaction tax on dealings in Wall Street, following the Great Depression. In this way he hoped to discourage high frequency trading, which made the markets more volatile. Overall, the idea has been a brainchild of the left. Right wing economists, such as the Chicago School, see such high frequency trading as important in showing the short term prospects of currencies and companies. To interfere with this is to impose government will in an area where they do not have expertise.

The area that the FTT proposes to regulate is the murky world of high-frequency trading (HFT). HFT involves the use of technology and highly sophisticated algorithms to rapidly trade securities. The speed of the trades that are made in HFT are phenomenal, with very low levels of profit made over the course of fractions of a second. It is easy to see from this how HFT can significantly effect the financial markets, and it has been demonstrated that it has played a central role in many dramatic stock market crashes, wiping out the savings of millions of regular investors in the process. The Technical Committee of the International Organisation of Securities Commissions warned in a recent report that “in a context of deteriorating market conditions a shock in one market can trigger destabilizing effects on the liquidity and price formation processes of related markets. This clearly threatens both the integrity and the efficiency of the markets”.

Proposals put forth for a similar tax today usually take the form of a small tax (not usually larger than 0.1%) on securities and derivatives. The prospect of a FTT, however, has been greeted with mixed reactions depending on the jurisdiction.

In the US, the issue came to public attention during Hillary Clinton’s campaign. The democratic party platform states that “we support a financial transactions tax on Wall Street to curb excessive speculation and high-frequency trading, which has threatened financial markets”. The party acknowledges that there are differences over whether to extend that to a general FTT, alluding to Bernie Sander’s demands as part of his unsuccessful campaign. There is, however, plenty of opposition in the US to a FTT. It has been described as “an answer in search of a question” (Cochrane, 2013:44) and it has been pointed out that the scope for tax avoidance is significant. The Brookings Institute notes that “the extreme arguments on both sides are overstated”. The US is definitely more polarised, and so it seems that “even if Clinton wins, the chances this [FFT Bill] would pass a Republican-controlled House are slim”.

In the EU, progress has been successful and swift. Not all EU nations, including Ireland, have been in favour of the move, so a select few, including Spain, France, Germany, and Italy have ploughed ahead in implementing a FTT. The rate of the tax is 0.1% on shares on bonds, and 0.01% on derivatives. This tax is in the advanced stages of planning, and has been helped by Europe’s stronger history of state intervention in markets. It has been said that the tax “could raise as much as €35bn for the 11 countries” that are involved in the deal. (Inman, 2013)

Piketty has noted progress on this front, and refers to the FTT  “one of the first truly European taxes”. (Piketty, 2014:56) However, he also says that he finds the tax insignificant in the fight against inequality. In his opinion, a tax on capital or corporate profits would be preferable. He also notes an important point about the structure of the proposed tax: that “the tax will not raise much revenue, because its purpose is to dry up its source”. (Piketty, 2014:651) In this sense, the tax works more as a tool of social change than a way of extracting revenue from a particular societal group. In this sense it is more like an excise tax, such as that on cigarettes.

The Central Bank of Ireland published a report in 2012 on the feasibility of a FFS in Ireland, in light of what was then early moves by the EU to move towards one. It found that, on the whole, a FFS would not be suitable for Ireland, and echoed Piketty’s criticisms. “The net gain in tax revenue for Ireland as a result of the introduction of the proposed financial transactions tax is likely to be modest and significantly offset by the loss of stamp duty revenue”. (Central Bank of Ireland, 2012: 52)

But the report also made another very important point. It raised the possibility of using “revenue recycling” to reduce income tax using funds from the FTT, thereby shifting some of the tax burden from labour to capital. What is meant here by “revenue recycling”, is that the extra revenue generated by the FTT can be used to lower income taxes on labour, at the expense of the income from capital. As our society increasingly becomes less labour-intensive, and capital takes over more of the workload, should it not be appropriate that capital also takes its fair share of the tax burden? Piketty and the Central Bank are both in agreement that while that indeed would be the effect, it would be a minimal one. Larger efforts are needed in terms of government policy in order to make any meaningful societal moves.

Billy Vaughan is a final year Law with Politics student at UCD. He wrote this post as part of his POL20180 module “capitalism and democracy”. He hopes to specialise further in European and international politics at postgraduate level.

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