Wednesday, 15 June 2011

Do £20 notes get left on the pavement? Some thoughts on the Financial Transaction Tax debate

By Neil McCulloch

There is an old joke in economics about a junior economist and a senior economist, who are walking along the street. They see a £20 note lying on the pavement, but the senior economist walks straight past. So the junior colleague, not wishing to appear stupid, does the same. But he can’t help asking “Why didn’t you pick up that £20 note on the pavement?”. “Oh”, replies the older economist, “I didn’t pick it up because it can’t really have been there, otherwise someone would have picked it up already!”

This joke was told by Dr Rodney Schmidt from the North-South Institute at a workshop in Brussels yesterday to launch IDS Research Report “The Tobin Tax: a review of the evidence”, which I co-authored with Grazia Pacillo. Rodney told it to the audience to counter the view expressed by Ian Harrison of the Association for Financial Markets in Europe, that if a Financial Transactions Tax (FTT) is such a good idea, why hasn’t it already been done?

Yet in one sense Ian is right. Although our Research Report shows strong evidence that a FTT is feasible, there are still a lot of technical details that need to be worked out in order to turn the idea into a reality. How, for example, do we prevent the tax migrating to offshore jurisdictions? How do we prevent it from distorting markets? How do we stop the markets from “re-engineering” financial instruments to avoid the tax? These are legitimate and important questions that need serious answers.

Currently we have a Catch 22 situation - a lack of clarity about how the tax would be implemented makes people assume it can’t be done, which, in turn, means that little effort is devoted to sorting out the details that might make it work. Yet there is now a lot of evidence that the tax is feasible. Even the IMF, who oppose the tax, acknowledge that it is technically feasible (see IMF 2010). When I have spoken privately to senior bankers and financial market actors they all agree that, in principle, it can be done.

At the same time, the thing I found remarkable about the Brussels gathering, was that the tone of the debate has changed. The question is no longer “Should we have a FTT?”, but instead, “How can we implement a FTT in a way that makes sense?”. In other words, not whether, but how?

But the “how” is clear. What is needed is a clear political statement from the G20 that it will be done. If the G20 can show political leadership, then this will force the academics and the industry into the same room – to sit down and seriously work through the mechanics of implementation. And for once, a £20 (billion) note will not be left on the ground.


Stuart said...

I am wondering why implementing an FTT is so difficult. My American brokerage confirmation statement already has three fees listed: commissions, service charges and securities transaction fee. My German brokerage confirmation statement has commission and courtage/transaction fee listed. What is so difficult about adding a .005% FTT? My usual securities transaction is about $10,000. Is another 50 cents going to dissuade me from making my trade? No, and neither would $1, $5 or even $10. I remember the days when I had to pay over $50 in commissions alone on such a transaction. The commission rate has since dropped to $7 in America and 9.99 Euros in Germany. Needless to say I am not a frequent trader, I have always invested for the longterm.

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