In the current circumstances, the issue of international financing is fundamental, if not vital, for states that depend on it to address their fiscal imbalances and achieve the sustainability of public debts generated by the global financial crisis.
The Proposed Directive from the European Commission (EC) for the creation of a common tax on financial transactions (TFT) thus arises from the need to search for innovative forms of resources.
Based on the premise that the TFT will generate increased revenue and reduce incentives for speculation in international markets and based on the idea that the financial sector should make its fair contribution to the costs of the crisis, the Interim Report of the G-20 Ministers’ Meeting (IMF 2010, A fair and substantial contribution by the financial sector; April 2010), pointed out that the TFT would allow for transferring the extra tax burden imposed on taxpayers in general to the financial sector.
The idea is not new. The first TFT dates back to the time of Keynes, who in 1936 advocated its introduction as a reaction to the Great Crisis of 1930, aiming to discourage and combat speculation in the buying and selling of shares in stock markets that would then incur a monetary cost. His theory, which was neither incompatible with nor repudiated by economic orthodoxy, led to the implementation of TFTs in several countries, most of them only of a temporary nature.
On this understanding, in the current Proposal, confirmed by studies (including by the IMF) and supported by some prominent economists, civil society organisations and opinion leaders, the TFT is perceived as a viable and sensible option.
However, in order for it to fulfil its purpose, and so that it can be applied to combat tax avoidance and secure a scale of revenues, the TFT would ideally need to be agreed and implemented on a global basis.
In practice, it is not surprising that we have to admit that a global TFT is not feasible. It might, however, become a feasible possibility, at least for a block of countries but consensus would first have to be reached. In a compromise position among eleven countries and under the enhanced cooperation mechanism, the EU has moved forward with its approach, recently approved by the European Parliament.
However, the question remains: is it possible to levy a tax on all market financial transactions at a rate of 0.1% for the purchase and sale of securities and shares on stock exchanges and 0.01% on derivative contracts, with all those who trade financial products being taxable for this tax, without it being based on gradual implementation?
The evidence seems clear. Notwithstanding the merit of the EC Proposal, we must admit the fragility of the fundamental premises of this type of tax, which requires a previous chapter of reforms in order to ensure its effectiveness. In other words, it is necessary to create an entirely integrated “ecosystem” for its reception, being inadvisable any individual initiatives by states and, in particular, the Portuguese state should be prudent in the use it makes of the legislative authorization included in the current state budget.
Because of the costs, both visible (decrease in market liquidity, risk of capital flight, transfer of costs to customers and, in an underlying line, lobbying and disintegrated tax exemptions) and invisible (costs in the processing of information for the assessment and payment of tax, related obligations, costs of prevention of fraud, tax evasion and abuse, risk of litigation, etc.), the current context and the legal framework clearly point to defects that prevent its natural development, running the risk of fragmentation and inefficiency.
in FundsPeople
17th July 2013