Ftt steers us clear of trading excesses

From Mr Suleika Reiners.

Sir, The source of the financial crisis was not simply banks as Hugo Dixon believes (“Europe can do better than the financial transaction tax”, Comment, September 13).

It was procyclicality in an intertwined financial system of banks and non-banking financial institutions such as funds and insurances. Excessive trading among them is an important driving force behind financial bubbles and the systemic-ally risky volatility of asset prices.

The purpose of the financial transaction tax is exactly to slow down these trading activities in the overall financial system. The charm of the tax – in contrast to a bank levy or a financial activities tax – is that it applies to every transaction: high trading frequency goes along with higher taxation. To enhance its countercyclical effect, the tax rate could even be scaled up in boom times. This has already been suggested by economist Paul Bernd Spahn in 2002 in a report commissioned by the German federal ministry for economic co-operation and development. Many reforms can be envisaged in order to raise revenues from the financial sector. Yet, the steering effect of a financial transaction tax is unique.

Suleika Reiners, Policy Officer for Future Finance, World Future Council, Germany

September 16, 2013 10:14 pm

Shun burdens that can harm Europe’s economic recovery

From Mr Tim Hames.

Sir, Hugo Dixon’s concerns are well-founded (“Europe can do better than the financial transaction tax”, Comment, September 13). Such a tax would do little to prevent a repeat of the financial crisis and will most likely result in increased costs to the end users of financial services.

Mr Dixon is wrong, however, to call for ending the tax deductibility of debt interest. Changes to the regime would make the cost of borrowing much higher for businesses and inhibit their ability to grow. Limiting or removing tax deductibility could be particularly destabilising and problematic in a number of key industry sectors, such as property and infrastructure, which have a structural reliance on long term debt. Given the fragile nature of the recovery, placing additional burdens on companies is the wrong move at precisely the wrong time.

Mr Dixon also makes the rather stunning assertion that private equity was one of the culprits of the financial crisis. This is simply not a credible argument and has been rejected by numerous investigations, including Lord Turner’s seminal review for the Financial Services Authority and Jacques De Larosière’s equally compelling report for the European Commission.

Our industry has invested £33bn in more than 4,500 companies in the last five years in the UK alone. Around 90 per cent of UK private equity and venture capital investment went to SMEs last year. Private equity has a key role to play in supporting Europe’s economic recovery, and any moves to discourage such investment would do nothing but harm business development and jeopardise future growth.

Tim Hames, Director General, BVCA – The British Private Equity and Venture Capital Association, UK

Further opinions on the subject (Economist.com)

A. You and your financial (speculative market) capitalists are always highly disingenuous in the way you discuss finance without highlighting that the real cancer of the global political economy is not so much the trading in shares - even though the total annual turnover in the developed countries is at least equall to the total capital value of all companies listed - but the unregulated pure speculative trading activities of the international banks mainly trading out of London and Wall St in the commodity, energy, financial (mainly forex and bonds) and mining markets which is now widely recognized to "serve no useful purpose" on behalf of civil society overall.

In general the continental Europeans, especially the North and even more so the Nordics, have a far greater sense of purpose other than to let a small group of speculators extract the wealth created by all simply to be shared out by the Davos and Jackson Hole cronies with the full support of the London, Wall St and Washington governing elites and if " Transaction Taxes" on all the great majority of these speculative (99%+) trading activities in these markets are able to curtail and claim back much of the ill gotten gains from this 1% crowd then go for it.

We also know that whenever London, Wall St and Washington are against anything the European continentals are planning to implement within the realm of Financial Capitalism it must be absolutely the right thing to do even for the real economy investors which again, you very disengenuously confuse quite deliberately with the speculative trading activities of the financial capitalists, and suggest that liquidity will dry up and banks will move to God know where etc etc all inthe name of what may I ask - apart from continuing the gravy train of this financial capitalist crowd - and then we wonder why the real economies of the west are in trouble - so be it I guess!!!

B. Couple of key comments:

- The Economist calls for more regulation, rather than tax. Interesting.

- The EU is the largest economy on the planet. Of course the tax will work.

- The article carefully avoids the issue as to whether the tax would achieve its goal, i.e. reduce the extremely harmful kind of off-balance and unregulated trading that has brought the financial world to its knees, and caused the great Recession. It should be noted that this kind of trading adds no real value to the economy - and the liquidity it pretends to create is not real - as the crisis showed.

- There is a fundamental argument of fairness in the FTT, which, again, the article does not address. What is missing is more revealing that what is stated.

- Since the crisis, we know we can't risk to have global finance system without global regulation. A global tax is the right starting point. It will focus minds, and have a positive effect in reducing the damage done by international finance to the real economy.

- "negative effect on GDP". We know that GDP is bogus, it does not actually reflect real economic growth or the actual benefit of economic activity for its actors. Just like we should take car crashes out of the plus side of the economy, we should be happy that "casino banking" growth is reduced. Such growth is positively harmful, and comes down to a bunch of incompetent fraudulent banksters gambling with tax money, with no liability attached. Limiting that activity is positive, even if it means formal GPD gets a small dip. That small dip only shows that we measure the wrong things, not that the FTT is a bad thing.

The tax the state collects for the transaction of labor is sometimes called personal income tax.

The tax the state collects for the transaction of goods and services is called VAT/Sales tax.

The question here, dear Economist, is: why should people transacting labor, goods and services be taxed, while people that transact capital not?

This is not a question of economic policy (although I bet an income or VAT tax of 0.1% would suddenly make working and trading much more competitive compared to investment banking), but a question of basic economic human rights and fairness.

C. The damage that this tax would do to the economy, revenues, jobs and the investor is known. If it is known, then it certainly must be intentional...and criminal.

This data is from the EU Commission that wants the tax so badly for their own funding. If the tax was Euro-wide: UK Parliament Economic Sub-Committee of the House of Lords, "The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax." That means negative revenue for those that are counting. UK Parliament European Scrutiny Committee citing the EU Commission's FTT Impact Assessment, before even including negative relocation effects, "a 3.43% fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs."

The IMF's FTT Final Report For The G-20, June 2010, "Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector. Because it is levied on every transaction, the cumulative, ‘cascading’ effects of an FTT—tax being charged on values that reflect the payment of tax at earlier stages—can be significant and non-transparent."

D. In terms of orders of magnitude: PWC publishes a guess as to the total tax take, including corporation, income and other taxes from financial services in the uk. There last figure was around £60bln. It is common sense that the eu can't possibly hope to raise an extra E37bln from this tax. It's all nuts. Regarding "speculation". The constant re-balancing of risk between banks and other counterparts is not all some fly by night mad gambling, it is the process by which a really tight liquid market is produced for the end user. The EU indirect tax guy seems to think that you can isolate end users,e.g. a big corporate wanting to switch currencies and delete all the interbank trading. You can......but the price the client pays will have increased by many many times the tax increment. It's like deriding a market trader for buying cheap oranges and then trying to sell them...speculative but and an essential part of the market. However i agree that huge positions in e.g. food product derivatives which are essentially cornering the food market are market abuse and should be regulated against.

E. Do you honestly think that is what these transactions do? Theoretically maybe but in reality they certainly do not. What does "proper allocation of resources" really mean anyway? It seems many of these transactions are bets. When you bet you pay the house a fee so you should also pay the taxman. Especially when the taxpayer bails you out when you make a mistake. This tax should be targeted at firms more than individuals. Many firms make money by manipulating transactions for no apparent economic benefit.

F. Rather than an impediment to those who would invest and wait, the FTT appears to be an attempt to becalm an otherwise embroiled market. It represents a minor irritant to static investors and a major impediment to those who, desirous of liquidity, maintain large market presence. In other words, it's a pain in the ass for people whose money is forever circulating in the largely imaginary realm of transaction. This is interesting because it would, to a larger degree than in the past, tie pervasively liquid funds to the less volatile currency of their point of origin. An unfortunate fate, the reduction of advantage or leverage, results for some who utilize their capitol surplus thusly. The trend towards a flattening of relations in the currency market as exemplified by Japan's mysterious desire to pursue inflation comes to mind. Perhaps the same invisible hand that wrests complicity from Japan is making a power play in financial markets. I am not sure why I am reminded of George Soros. I find myself wondering what he might say. I wonder less what Veblen might have said.

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