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The following transactions could/should be subject to a general financial transaction tax (FTT):

329 _{This section summarises some key results of a comprehensive study on the possible effects of a general}

financial transactions tax (Schulmeister – Schratzenstaller – Picek, 2008). A shorter version is Schulmeister (2009E). See also Baker et al. (2009), Baker (2008), Jetin – Denys (2005), Pollin – Baker – Schaberg (2003), Schmidt (2008).

Chapter 5 – The Case for Financial Transaction Tax 182  All spot and derivatives transactions on organised exchanges, e.g., trades of stocks

and interest rate securities, as well as trades of futures and options related to stocks, interest rate securities, currencies and commodities.

 Those over-the-counter (OTC) transactions, which are directly related to asset prices, in particular to exchange rates and interest rates. The first group of transactions is clearly defined. The second group covers all transactions reported by the ―Triennial Central Bank Survey‖ plus OTC spot transactions of interest rate securities and stocks

An FTT would specifically dampen very short-term oriented trading in derivatives markets. There are two reasons for that. First, an FTT makes trading the more costly the shorter its time horizon is (e.g. technical trading based on intraday data). Second, an FTT would dampen derivatives trading since the tax rate refers to contract value (e. g. the effective tax on the margin ―invested‖ is, by the leverage factor, higher than the tax relative to the notional value).

Since long-term asset price trends (―bulls/bears‖) are brought about through the accumulation of (very) short-term runs, an FTT would also dampen the ―long swings‖ of exchange rates, commodity prices and stock prices. Hedging, as well as ―real-world-transactions‖ (this would only concern foreign exchange transactions stemming from international trade), would hardly be affected by a low FTT between 0.1 per cent and 0.01 per cent.

The size of this reduction effect depends on the tax rate, the pre-tax transaction costs and the leverage in the case of derivatives instruments. For each tax rate and type of instrument, a low, medium and high ―transactions reduction scenario‖ (TRS) is specified. In the case of the medium TRS, it is assumed that transactions would decline by roughly 75 per cent at a tax rate of 0.1 per cent, at 65 per cent at a rate of 0.05 per cent and by roughly 25 per cent at a tax rate of 0.01 per cent. Table 5.2 represents the estimated FTT revenues at a tax rate of 0.05 per cent under the assumptions of the medium TRS (based on 2007 transactions data – based on 2010 data, revenue estimates will be by roughly 30 per cent higher). Overall revenues would amount to 1.21 per cent of world GDP or US$661.1 billion. More than half of the revenues would stem from derivatives transactions on exchanges. Taxes on spot transactions would amount to only 0.11 per cent of global GDP.

Chapter 5 – The Case for Financial Transaction Tax 183 This study estimates the potential revenues of a general FTT for three tax rates, namely, 0.1, 0.05 and 0.01 per cent (see Tables 5.1, 5.2 and 5.3 below).. The calculation assumes that the tax base is the notional value of the respective transaction. This design implies that the tax burden, relative to the cash invested to acquire a certain instrument, grows as transaction costs fall and the leverage effect rises. Such an FTT would hamper specifically those transactions that involve high leverage and, hence, a high risk (chance) of great losses (of profits). The revenue estimates are based on the assumption that transaction volumes will be reduced by the introduction of an FTT. The size of this reduction effect depends on the tax rate, the pre-tax transaction costs and the leverage in the case of derivatives instruments. For each tax rate and type of instrument, a low, medium and high transactions-reduction scenario (TRS) is specified.

Tables 5.1 and 5 2 present the estimated revenues of a general FTT for the world economy as a whole as well as for the main regions. In the case of the medium TRS, overall tax revenues would amount to 1.52 per cent of world GDP at a tax rate of 0.1 per cent, and to 0.49 per cent at a tax rate of 0.01 per cent. In North America and Europe, tax revenues would be similar in size (relative to nominal GDP); in the Asian-pacific region FTT revenues would be lower by roughly one third than in North America and Europe. In the rest of the world, revenues would be negligible. It is interesting to note that the estimated revenues of a general FTT at the low rate of 0.01 per cent come close to the hypothetical revenues from a VAT on financial services.

In Europe, FTT revenues at a rate of 0.01 per cent are estimated to lie between 0.59 per cent and 0.78 per cent of GDP (Tables 5.1 and 5 2). If financial services were not exempt from VAT, the latter would yield roughly 0.7 per cent of GDP (this estimate implies a share of the financial sector in overall value added of 3.5 per cent and an average VAT rate of 20 per cent330. Hence, the introduction of a general FTT would roughly compensate for the (distorting) exemption of financial services from VAT. In addition, a general FTT would affect the (relative) profitability of different types of activities within the financial sector. Financing, insurance and risk transformation would practically remain unaffected by an FTT, whereas short-term trading would become more costly (in particular derivatives transactions).

330

Chapter 5 – The Case for Financial Transaction Tax 184 The following tables 5.1 (Hypothetical Transaction Tax Receipts), 5.2 Currency and

Derivatives Potential Revenues from a FTT) and 5.3 Cash, Spot and Futures Markets

Potential Revenues provide evidence of substantial resources that could be available to nation states that are prepared to embrace the potential for market equality.

Table 5.1: Hypothetical Transaction Tax Receipts in the Global Economy 2009.

Tax rate: 0.05%

Table 5.2: Currency and Currency Derivative Trading: Potential FTT Revenues.

2007 (BIS) Data Daily Traded Value as

at 2007

Financial Transaction Tax (FTT) Proposed Rate

Revenue (estimated) per Year

Currency Traded Value (US share =25%)

$800 billion (US) 0.01%/side US$40 billion

Currency Derivative Traded Value (US Share = 50%)

US$4 Trillion 0.01%/side US$200 billion

Total US$240 billion

Dollar Derivative Traded Value (US share = 90%)

Chapter 5 – The Case for Financial Transaction Tax 185 Table 5.3: Cash, Spot and Futures Markets: Revenue Estimates.

Product 2007 Traded Value

(USD trillions) 2008 Traded Value (USD trillions) FTT Rate (per side) Revenue Raised 2007 (USD billions) Revenue Raised 2008 (USD billions) Cash Equity $52.30 $64.10 0.0025 $130.75 $160.25 Index Futures $50.00 $54.60 0.00125 $62.40 $68.30 Index Options $36.00 $32.25 0.00125 $44.80 $40.25 Total (one side) $236.95 $268.80 Total (both sides) $473.90 $537.60

Chapter 5 – The Case for Financial Transaction Tax 186 Figure 5.4331_{: Size of Exchange and Over-the-Counter Derivatives: Markets and Taxes.}

331 _{Stephan Schulmeister. 2011. Figures and tables 5.1 to 5.4. Trade Union Advisory Committee to the}

Organisation for Economic Cooperation and Development. (OECD) 2011. Size of Foreign Exchange, Exchange Traded, and OTC Derivatives Markets and Parameters of Tobin, Jetin, Schulmeister and Baker. Sourcing data from the Bank for International Settlements 2011.

Chapter 5 – The Case for Financial Transaction Tax 187 An international financial tax on all trades would ameliorate some of the gross structural losses as governments grapple to explain recovery theories to constituents that are seeing public funds being used to pay government debt. A minimal tax applied to trades at the top- end of the market would not only increase market transparency and accountability but would for the first time allow states and global citizens an opportunity to share the massive and disproportionate monetary gains taken by a relatively small group of the population who have politically engineered the global political economy to benefit their goals of short-term

accumulation of wealth, aided and abetted, by state compliance. It is no coincidence that the accumulated speculatively derived wealth models across developed countries are anathema to the orderly wellbeing of the global citizen.

In France, –past President Sarkozy332 had been a long-term campaigner of an FTT (albeit without supportive traction from opposition parties in the run up to the election). The past French President told an anti-poverty summit in New York that state funding will not be sufficient to meet ambitious global development goals by the deadline of 2015. ―I want to share with you my conviction that we won‘t get there with just public funds and that we will have to associate ourselves with the private sector,‖ he told the UN general assembly at the start of a three-day summit.Newly elected President campaigned on a platform of financial accountability in France. His first task was to legislate the FTT into law.

Recently the head of the United Kingdom based Financial Services Authority, Lord Adair Turner333, stated that it would be wrong to exclude policies related to the introduction of financial transaction taxes saying that regulatory arrangements to ensure larger capital requirement are held at bank levels against risk:

However, even with higher capital requirements, financial trading activity may continue to grow both within the banking system and outside it, and those high levels of trading activity may continue to support unnecessary rent extraction by the financial sector, and may generate economic instability. If that is the case, and if society is worried about the consequences, either for financial instability or for the size and remuneration of the financial sector, then it should not exclude consideration of taxes on financial transactions. Anyone who thinks such taxes would prevent all or even most rent extraction in the financial sector, or that they could be designed to tune, the liquidity of markets to precisely its optimal level – neither too liquid nor insufficiently liquid – is fooling themselves. But in the real

332 _{Harvey Morris. ―Sarkozy wants private finance to help meet global targets.‖ The Financial Times. 20}

September 2010.

333 _{Lord Adair Turner, ―Responding to the financial crisis: challenging past assumptions.‖ 30 November 2009}

Chapter 5 – The Case for Financial Transaction Tax 188 world of imperfect instruments with which we seek results at least a bit better than those we see

today, they should not be excluded from consideration.

The following section (5.6) describes the macroeconomic effects that would flow from an FTT introduced globally. Often described as dysfunctional in times of crisis, financial trades after the introduction of an FTT would be dampened during the times of high volatility (international runs on currencies and capital flight). Short-term speculation would draw a cost, with each cross-border transaction, (resultant of the accumulation of extremely short- term runs (based on intra-day data) and likewise high volume transactions would be taxed strongly. Whilst large speculators may not feel the charges, it is sure to be factored in by the vast numbers of private traders operating from homes around the world. This system provides ethics and integrity to the markets. Dampening volatility is a positive potential outcome, which would tend to steady ―herd effects‖ of trading ―runs‖.

Chapter 5 – The Case for Financial Transaction Tax 189