A Financial Transactions Tax: Inefficient or Needed Systemic Reform?
Buckle, Ross P., North, Gill, Georgetown Journal of International Law
TABLE OF CONTENTS I. INTRODUCTION II. FINANCIAL MARKET TRADING--THE FACTS III. PROPONENTS OF A FINANCIAL TRANSACTION TAX (FTT) IV. EUROPEAN COMMISSION REPORT V. IMF REPORTS A. A Fair and Substantial Contribution by the Financial Sector: IMF Staff Final Report for the G-20 B. IMF Working Paper: Taxing Financial Transactions: Issues and Evidence 1. Asset Valuation and Cost of Capital 2. Turnover 3. Liquidity 4. Price Discovery 5. Volatility i. Short-Term Volatility ii. Longer-Term Volatility 6. Waste 7. Matheson Conclusions 8. Our Response to the Report Findings VI. THE ADMINISTRATIVE FEASIBILITY OF AN FTT 1. Territorial Scope 2. Taxable Event 3. Tax Base 4. Taxable Person 5. Assessment & Collection of the Tax VII. RECENT FTT DEVELOPMENTS VIII. CONCLUSION
The global financial crisis (GFC) sparked vigorous debate on the role of financial institutions and capital markets, and the extent to which financial institutions and other capital market participants should contribute to the broader economy. Much of this debate has centred on the appropriate mechanisms to enable governments to recoup taxpayer monies used to bail out failing institutions and appropriate tax regimes going forward. Proposals considered at an international level have included financial institution levies (such as a financial stability contribution), a financial activities tax (FAT) and a financial transaction tax (FTT) (sometimes referred to as a securities transaction tax). France, Germany, the United Kingdom (UK), and other countries have already imposed levies on their financial industries to recoup bailout funds provided in the GFC, boost government revenues, and build a fund to help meet the cost of future crises. (1) This Article focuses on an FTT as a needed addition, or alternative to, bank levies. (2)
Critics of an FTT argue that a tax would have distorting effects on the function of the market and harm its efficiency due to reduced liquidity, higher volatility, and increased capital costs. (3) Those who support an FTT argue that by reducing trading volumes an FTT would enhance the ability of markets to allocate resources efficiently and allow important financial and human capital to be redeployed into more socially productive areas. Experts generally agree that collection of the tax through clearinghouses would be straightforward and cheap, and that tax avoidance can be minimized by applying the tax to a broad range of transactions across all jurisdictions. (4)
Staff of the European Commission (EC) and the International Monetary Fund (IMF) considered an FTT in 2010. Both of these reports rejected the tax in favor of other revenue raising schemes. The EC report indicated that "[e]ssentially, the debate on financial transaction taxes boils down to the question of the influence of transaction costs on trade volume and price volatility, and whether they can serve as a corrective device to reduce the number of allegedly harmful short-term traders." (5) Although the IMF report was more comprehensive in scope, it also focused primarily on short-term trading, liquidity, price discovery, volatility, and cost of capital effects.
This Article outlines and discusses the EC and IMF staff reports. We argue that the frameworks used to assess the efficiency, economic, and other effects of an FTT are unduly narrow. The primary argument in the reports is that increased trading leads to enhanced liquidity and lower transaction costs, which leads to lower costs of capital and improved economic outcomes (the trading cost of capital model). This argument is repeated like a mantra. However, the empirical research referenced in the reports is generally limited to microstructure studies, with the crucial links from the short-term price effects to long-term economic and community outcomes assumed rather than established. …