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Taxation of Financial Transactions, a Means for More Sustainable

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Taxation of Financial Transactions, a Means for More Sustainable vulnerable groups of society hardest. Also financial resources, needed to anticipate to climate change and to meet the globally Taxation of Financial agreed Millennium Development Goals, are under threat. transactions, A means for more sustainable development This is in harsh contrast with the conduct of a part of the financial industry, which in the by Burghard Ilge past successfully lobbied for financial deregulation which is now being identified 1– Introduction to have contributed to the crisis. Not only has the finical sector been highly under- The financial crisis as a wake up call taxed, it also made huge profits from the financial turbulences caused by the crisis. During the summer of 2007 a growing [For the example of Goldman Sachs see Box 2] number of US based financial institutions started to face serious problems. The Various reasons have been given why a growing uncertainty about the exposure of crisis of such dimensions could develop. investors to increased risks of default led However, it quickly became apparent that banks to hoard liquid assets which led to a this crisis could not just be explained by sharp increase of the cost for lending the irresponsible behavior of a few between banks, causing the biggest individuals, but that the causes are more financial crisis in the western hemisphere systemic. since World war II During the last decades, the governance of Investors were forced to realize that they increasingly integrated international were unable to quantify the value and risk financial markets [I1] was further of the increasingly complex financial challenged by the pace of financial products, which directly or indirectly were innovation. linked to assets of real estate, when the booming housing sector in the US declined. But adapting to these changes has not been the only challenge. In September 2008 the failure of Lehman Brothers led to the final collapse of In particular legal reform aiming a confidence in the global banking sector. flexibilisation and deregulation of the Through the complex network of bilateral financial services industry undermined the contracts between banks, investors and required governance needed to ensure a other institutions this crisis quickly spread well functioning and sustainable to other countries and brought the fragile international financial sector [I2] global financial system to the brink of a [For some examples for the US markets see total melt down. Box 1] . The resulting collapse of large financial It is widely recognized that regulatory institutions, the bailout of banks by financial sector reform is urgently needed. national governments, and downturns in It will have to reverse the unsustainable stock markets led to substantial financial past deregulation agenda advocated on commitments incurred by governments, behalf of the Financial service industry. and a significant decline in economic Such reforms will have to address in activity. The IMF estimated that while the particular the increasing importance of the majority of the losses had still to be shadow banking system, the increased role realized, in the US alone this could reach of trade in financial derivatives and off- over 2 trillion US dollars. balance sheet financing. Governments now still face huge fiscal Beside financial deregulation one aspect, challenges, which lead to sever budget cuts which is widely seen to have accelerated which are expected to hit the most the unsustainable development of financial Both ENDS www.bothends.org 1 Financial Transaction Taxes [FTT's] Box 1: There is now a growing interest in the Some financial reforms in the USA which have potential role of financial transaction taxes been identified to have contributed to the finan- (FTT's). cial crisis: 1) 1980: The " Depository Institutions Deregu- Financial Transaction Taxes are not only a lation and Monetary Control Act " (DIDMCA) mechanism to generate urgently needed phased out a number of restrictions on banks' financial resources in the aftermath of the financial practices, broadened their lending pow- recent crisis; they also can have a ers, and raised the deposit insurance limit from regulatory effect. $40,000 to $100,000 Transaction taxes can be raised on the sale 2) 1982: The " Garn–St. Germain Depository of specific financial assets (such as stock, Institutions Act ", provided for adjustable-rate bonds, futures or other financial mortgage loans Box 2: 3) 1999: The " Gramm-Leach-Bliley Act, re- pealed part of the Glass-Steagall Act " of 1933. The Goldman Sachs Group is one of the biggest This repeal has been criticized for reducing the players in the international financial service in- separation between commercial banks (which dustry. traditionally have a conservative culture) and investment banks (which have a more risk- It has been reported that Goldman Sachs, which taking culture). depends for 68 % of its revenue on trading [GS1] , made an approximate $4bn profit from 4) 2000: The " Commodity Futures Moderniza- betting on the sub-prime collapse ensuring that tion Act of 2000 ". Derivatives such as credit de- "2007 was a bumper year for the bank" [GS2] . fault swaps (CDS) can be used to hedge or Goldman Sachs is believed to have been one of speculate against particular credit risks. The vol- the biggest profiteers from the crisis [GS4] . The ume of CDS outstanding increased 100-fold same bank was one of the biggest beneficiaries from 1998 to 2008, with estimates of the debt of government interventions during the crisis. covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. Total When in response to the subprime mortgage over-the-counter (OTC) derivative notional val- crisis a new lending facility was created by the ue rose to $683 trillion by June 2008 Federal Reserve in spring 2008. Goldman Sachs was one of the heaviest users of these loan fa- markets, has been the drastic reduction in cilities. In the period 15 September - 26 No- vember 2008 Goldman Sachs borrowed a total financial transaction costs. This allowed to of $588 billion at interests rates between 1,25 - shift financial decision-making process from 2,5% against collateral such as corporate mar- a more long-term perspective to new ket instruments and mortgage-backed securities selling and buying strategies with the aim [GS6] . to harvest and maximize short term profit gains. In 2010 Goldman Sachs was also criticized for its involvement in the 2010 European sovereign Besides, through regulatory changes this debt crisis. Between the years 1998–2009 Gold- has also been driven by technological man Sachs has been reported to systematically changes. While in movies trading at stock having helped the Greek government to mask exchanges is still represented by men its national true debt facts. In September 2009, though, Goldman Sachs among others, created shouting at one another on the trading a special Credit Default Swap (CDS) index for floor, trading nowadays more or less the cover of high risk national debt of Greece. exclusively happens electronically inside of The interest-rates of Greek national bonds have computers, where a growing number of soared to a very high level, leading the Greek computer programs take the decision about economy to the brink of bankruptcy in March selling or buying orders based on changes 2010 and yet again in May 2010. [GS5] of market data on the level of milli- and microseconds. Goldman Sachs reported for the year 2010 net revenues of US $ 39,16 billion [GS3] 2 derivatives). They can be applied to Currency Transaction Tax [CTT] currency exchange transactions or can be general taxes levied against any mix of Nobel Lauriat James Tobin first different transactions of different financial formulated the idea of a currency products. transaction tax in 1972 [B1] . The main idea of such a tax was to use it as a means for The idea of financial transaction taxes FTTs controlling exchange-rate volatility. This is not new. After briefly touching on the was driven by his concern that ideas of major economists in the past we will present a few country examples of the National economies and national currently existing praxis to use Finacial governments are not capable of Transaction Taxes on the national level. adjusting to massive movements of After this we will briefly look at estimates funds across the foreign exchanges, of the resources which are expected to be without real hardship and without mobilized by a broader application of significant sacrifice of the objectives of Financial Transaction Taxes. national economic policy with respect to employment, output, and inflation. [B2] ... 2- The ideas of Major economists My proposal is to throw some sand in The idea to use a Finical Transaction Tax (FTT) the wheels of our excessively efficient to prevent market failure and to stabilise international money markets... financial markets is not a new one. Since we can not present her the wide body of The proposal is an international uniform related scientific literature we just want to tax on all spot conversions of one present her briefly the key ideas of some currency into another, proportional to major economist the size of the transaction. [B2]... Keynes' financial transaction tax Let me return to my proposed tax, and provide just a few more details. It John Maynard Keynes was one of the would be an internationally agreed first proponents of a financial transaction uniform tax, administered by each tax. In his book from 1936 "The General government over its own jurisdiction. Theory of Employment, Interest and Britain, for example , would be Money" he argued that the excessive responsible for taxing all inter- currency speculation by financial traders increased transactions in Eurocurrency banks and volatility of stock prizes and instability of brokers located in. London, even when financial markets. He explained the sterling was not involved. The tax difference in stability between the markets proceeds could appropriately be paid in the US and in the UK by the different into the IMF or World Bank.
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