Rethinking Bretton Woods | Tue, May 4, 2010
CIDSE's response to European Commission Staff Working Paper "Innovative Finances at a global level", of April 4, 2010.
The European Commission’s commentary on the Financial Transaction Tax uses outdated arguments and does not take into consideration recent developments. It communicates an analysis that misrepresents the case for a serious consideration of Financial Transaction Taxes. Such taxes could potentially curb short term, highly leveraged transactions on financial markets that have no added value for the real economy. Revenue generated in Europe alone would approximate Eur 100 billion per year according to the most conservative estimates. This money could well be used to invest in the global effort to reach the Millennium Development Goals and deal with climate change.Misrepresentation
The Commission’s Staff Working document Innovative financing at a global level misrepresents Financial Transaction Taxes. The commentary is based on the assumption that a FTT would be applied uniformly across financial markets and products. Contrary to this, the proposal is to introduce FTTs at different rates in the various markets and product segments (stocks, bonds, commodities, currencies, futures and derivatives) depending on asset values, underlying transaction costs, and maturities. Many countries already apply such taxes in one or other form.
The commentary concludes that the tax would not be progressive. This again fails to take into consideration one of the fundamentals of the FTT proposal. Transactions that are intended to be most impacted by FTTs are highly frequent, highly leveraged, short-term transactions such as conducted in technical trading through sophisticated computer software. Such trading is the most distortionary and does not contribute to the real economy. The effective burden of an FTT on lending, depositing, buying of insurance contracts and the financial costs for government as such would be negligible because the time horizons of those transactions are much longer than those of technical trade transactions.
The paper expresses the concern that a FTT would be evaded by large-scale evasion and migration to other markets. The London Stock Exchange collects a unilateral stamp duty at a rate of 0,5% on shares. Yet its financial market remains one of the largest in the world. The feasibility of collecting a Currency Transactions Tax unilaterally on trading in a given currency no matter where in the world such trading occurs has been demonstrated. Any trade in a currency has to be finally settled by the issuing authority, the Central Bank. Moreover, in recent years, financial markets have become more computerized and automated, making avoidance difficult. The Continuous Linked Settlement (CLS) Banks for instance settles 75% of all wholesale foreign currency worldwide. A similar globally centralized electronic system has recently been put in place for transactions in derivative instruments of all kinds, at SWIFTNet or SwapClear or DerivServ. These transactions can be taxed unilaterally, without fear of mass migration of activity offshore and without disproportionate administrative costs to country applying the tax. Efforts are underway to make sure that more complex derivatives are also covered by electronic, automated systems.
Finally, it has to be stressed that FTTs are not taxes on clearing and settlement. Clearing and settlement services merely provide the information needed for collecting FTTs. Actual collection would be by the tax authority or its agent.
Along with the Financial Transactions Tax, the Commission also considers the implementation of a stability levy as an innovative financing instrument. While emphasizing that such a levy does not dismiss the case for adopting FTTs, the inconsistency of the critique of the stability levy as compared to that of the FTT is quite telling. The paper only fleetingly treats the issue of moral hazard which is a fundamental concern about this mechanism. A stability levy would not prevent financial institutions from taking risks of a scope similar to what caused the financial crisis in the first place. Moreover there is no way of guaranteeing that the money raised would be sufficient and readily at hand to cover the costs of a future financial meltdown. Finally, a stability levy would not provide any new money to the real economy. This last point is yet another strong argument for FTTs.
We are five years from the 2015 MDG deadline and five years after the G8 committed in Gleneagles to scale up ODA and reduce sovereign debt that was preventing countries from investing in poverty eradication. We are in the midst of difficult negotiations to find the means to reduce the effects of climate change and adapt to its impact. FTTs are expected to generate about Eur 100 billion per year in Europe alone, calculated on the application of a minimal tax rate of 0,01%. They would provide predictable additional finance for development, including and beyond the Millennium Development Goals, and other global imperatives such as combating climate change.
Click here to read the full European Commission paper.