Yesterday was the conference day in Amsterdam at which I delivered my talk on the FTT versus the FAT (see previous entry). The FTT, aka (in an absurd misnomer, whether one Iikes the tax or not) the "Robin Hood tax," did not, for the most part, receive a lot of love. Not surprisingly, representatives of banks and hedge fund-type asset managers were, shall we say, restrained in their enthusiasm for the measure. But academics were mostly skeptical as well, for good reason, notwithstanding the contrarian instincts that a couple of us had.
By the way, although for convenience I'll continue calling the European Commission's proposal an FTT, it is really an STT, or securities transaction tax, as stock trading (other than primary issuance) is the core item covered, and things such as currency exchange (the original Tobin tax target) and debt transactions are excluded.
An FTT is potentially extremely avoidable. For example, as is well known, geographically. A telling example arose when Sweden enacted an FTT a few years back, even though all the financial actors that would have been charged with collecting the tax said they would avoid it by going to London. This of course is a standard taxpayer threat, not always fulfilled in practice, but lo and behold, when the tax was enacted 60 percent to 80 percent (depending which estimate you take) did indeed go to London virtually overnight.
Then of course there is the issue of using derivatives. Why sell stock, for example, if you can use a swap instead. So a modern day FTT is a joke unless it can reach derivative transactions, by interpreting them as versions of some underlying "primary" transaction.
The Commission's response to this problem has been to try to pitch the proposal broadly. While it can't reach transactions that wholly leave the European tax net (e.g., say an American pension fund would have used German bankers to purchase developing world equities, but decides instead to use a U.S. broker), but the design tries to push having some sort of European connection as hard as it can.
Likewise, derivative transactions ostensibly are reached by basing the tax (though at a lower rate than for other transactions) on the highest (in effect) notional principal amount one can come up with in defining the direct transactional equivalent. (Unclear, of course, whether this is coherent or feasible.)
Exceptions for debt and insurance, which are excluded from the reach of the tax, would likely offer fertile tax planning grounds for avoidance efforts, especially if some EU countries decided to compete with each other for the hosting privilege by, say, broadening their state law definitions of insurance.
The Commission's STT would reach a lot of inter-bank transactions (often taxing both sides), and ostensibly would thus apply even to deemed transactions between branches of the same company or corporate group. Indeed, the Commission may regard this as a strength of the proposal, as it ostensibly counters the critique that customers rather than the banks themselves are being taxed. Some pointed out that this sort of cascading tax within the productive process is exactly what the VAT was supposed to end. (And it is of course contrary to any well-informed economic view about how to make business taxation less rather than more inefficient.)
As the next to last speaker on a long day, I was able to modify and fill out my commentary (from the previous blog entry) a bit, such as by noting that what I see as the best case for some sort of an STT (to discourage socially excessive pursuit of zero sum trading gains) would face many of the same problems but require a very different design. I might want to emphasize taxing trades with customers rather than internal cascading, but then again, what is a "customer" for this purpose? Surely it should include people who are seeking trading gains through a business entity (whether via share ownership or compensation arrangements), which potentially brings back the cascading issue. (And, just because integrated businesses, as distinct from those dealing with each other at army's length, are engaged in zero sum battles over division of the surplus, does that mean we want to comparatively tax-favor them? That wholly contradicts the Coase principle of hoping they will pick the arrangements that are best on a pretax basis.) So perhaps I have to settle for an STT just on sales to customers, though including some legal entities such as shells and pension funds, and without here affirming that it would actually be worth doing in the end.
A financial activities tax or FAT on banks, using a VAT-like design but perhaps with rising marginal rates to address bigness, rents, or suspected hidden tail risk (with the choice importantly affecting key design features) seems considerably easier both to design and to rationalize persuasively.
No comments:
Post a Comment