Simmons on an FTT

Geoff Simmons of the Morgan Foundation writes on an FTT:

Some are convinced New Zealand would be better off. They think that bankers and traders are getting more than their fair share of benefit out of the globalised economy, that speculation is excessive, this is contributing to the greater volatility and uncertainty in markets so Kiwis are worse off. Given the billions that pass through the financial sector every day, the idea is that clipping the ticket on each transaction would raise a lot of money and reduce both speculation and volatility in financial markets.

However, not all transactions are bad – when you get paid, for example, or make a payment on your mortgage. Or send money overseas to pay for your upcoming holiday. Would you mind someone clipping the ticket on all of those? Of course, you can specify what kinds of transactions you want to target with a tax, such as house sales (via a stamp duty) or share trades or foreign currency deals. But ordinary people still engage in all of those, at the very least through KiwiSaver.

Sure, some transactions are purely speculative, but an FTT won’t just stop those. It is a sledgehammer and would not discriminate between ‘good’ and ‘bad’ financial transactions.

So an FTT would be very blunt.

Research has found that (unsurprisingly) people respond to FTTs such as stamp duty by reducing the number of taxed transactions made. In other words, house sales drop. This doesn’t alter the intent of transactions, simply the number. Stamp duty hasn’t prevented speculation on housing, nor reduced volatility in the market. Quite the contrary, having fewer transactions can increase the volatility in the market. Fewer transactions can also have their costs in terms of the efficiency of the economy. Stamp duty, for example, makes it more likely for an elderly person to hold on to a home that is too large for them, and therefore makes it more difficult for families to find the houses they need.

The larger you are the easier it would be to avoid. For example huge financial services companies would simply run credit and debit balances with each other and maybe only physically transfer cash once a year for the net amount.

The experience of Sweden’s FTT has been interesting. When it was introduced, revenue was far lower than predicted because of changes in the number of financial transactions. In fact, the lower number of transactions reduced revenue from Sweden’s capital gains tax, so the government ended up with less revenue overall.

New taxes often have unforeseen consequences. The Mexico sugar tax was meant to reduce sales of soda drinks but the tax is bringing in more money than forecast, which means sales have not decreased.

In short, the FTT appeals mainly to those who seek to get at “wicked bankers and evil speculators” but it’s pretty naive. It is unlikely to raise a lot of money unless there is a global agreement; otherwise it would leak like a sieve, penalise quite innocent and necessary trade, impede economic activity unnecessarily – all features of a bad tax. In the meantime, taxes like the comprehensive capital income tax (CCIT) seem to have much more potential to raise serious revenue and benefit the economy by closing existing tax loopholes.

I don’t think an FTT would be good. As Simmons says, it won’t work unless other countries do it also – and even then possibly not.

I do support a comprehensive capital gains tax (on everything including the family home) but it should only apply when gains are realised. The CCIT would apply even if no gains are realised or even if you make a loss as it assumes a minimum 5% return. That’s more a wealth tax than a capital gains tax.