Inequality in the Capability to Achieve Financial Independence and Security, Enjoy Dignified and Fair Work, and Recognition of Unpaid Work and Care

CASE STUDY No 2

Domain 4: Financial security and dignified work: Inequality in the capability to achieve financial independence and security, enjoy dignified and fair work, and recognition of unpaid work and care

Main Driver Category 4.7: Lack of progressivity of tax system and tax avoidance and evasion

Candidate Policy: Taxing financial transactions

Professor Ben Fine School of Oriental and African Studies (SOAS) London

July, 2019

Introduction: financialisation and finance sector taxation Over the last decade, the notion of financialisation has exploded across the social sciences, albeit with the notable exception of mainstream economics. A general definition (provided by Epstein, 2005, p. 3) explains financialisation as “the increasing role of financial motives, markets, actors and institutions in the operation of the domestic and international economies”. In short, it refers to the fact that finance has occupied an increasing, even dominant, presence and influence over our economic and social lives, from the global markets down to the everyday activities of households. In the wake of the Global Financial Crisis, it is increasingly acknowledged that the expansion of finance and of financial assets has got out of hand.

Financialisation has involved the phenomenal expansion of financial assets relative to real activity (by three times over the last thirty years), as well as the proliferation of types of assets traded (from derivatives through to futures markets). Speculative investments have expanded enormously at the expense of real investment. (Foreign currency trading exceeds $5 trillion dollars per day, more than fifty times what is needed for foreign trade).

Financialisation has also involved shareholder value, or financial worth, being prioritised over other economic and social values. While wages for workers are squeezed, exaggerated rewards are available to the elite who work with or within the financial sectors, as well as to those with advantageous access to financial markets. Accompanying this concentration of financial advantage, more aspects of our economic and social life have been put at the risk of volatility from financial instability (as with the food and energy crises that preceded the financial crisis). In a financialised world, even the markets for basic needs such as food, energy, housing and health, especially where they are subject to privatisation and user charges, become subject to speculative volatility, intensifying stressful vulnerabilities in the wake of price spikes for those on low incomes.

There is now growing attention to the fact that returns to asset ownership tend to increase inequality. However, there is still much less attention on how, over the last thirty years, the form taken by those assets has increasingly been financial. In this context the possibility of raising tax revenue from financial transactions and financial markets is particularly relevant. Financial transaction taxes are also a useful policy option in that they can be used to help regulate financial markets’ volatility, if designed specifically to discourage the most speculative transactions.

Introduction: financial transaction taxes A financial transaction t a x is a t a x on any financial transaction that is not directly for goods and services. It is necessary to be mindful of which financial product being proposed for a tax levy. If it is on credit card use, for example, this could act for consumer products just like a sales tax, which is generally perceived to be regressive. The poor will pay proportionately more for their basic needs, to the extent that they are bought on credit. So, it will matter who is undertaking the transaction, and for what purpose – whether it be a wealthy individual or a pension fund, for example, with the latter then having less to distribute to what might be its worker beneficiaries. And, it should be borne in mind that the state makes its own operations in financial markets, selling government bonds to savers for example or to raise financing for expenditure on essential services. These would be discouraged to the extent that they were taxed. In short, it would be necessary to have a more or less sophisticated tax system depending upon what financial transaction was being undertaken and by whom, with the main challenge being how to effectively target excessive speculation.

The most prominent form of financial transaction tax (FTT) has been the Tobin Tax, designed to be levied on foreign currency transactions as these appear to be of the most speculative kind and to be discouraged as such as a source of instability. The Tobin Tax, or currency transaction tax, has raised a numbers of issues that have been intensely debated, such as: on what transactions should it be levied, does it need to be internationally agreed, can it be avoided and evaded, at what level should it be set, and would it genuinely reduce instability and speculation. Unsurprisingly, a number of countries, and prominent organisations and individuals, have come out in favour of the Tobin Tax from time to time (with substantial popular support in polls), although there have also been prominent free (financial) market opponents. Its impact has primarily not been one of practical application but of mobilising support to intervene in financial markets.

There are a whole variety of other types of financial transaction taxes including:  Securities transactions taxes (STTs): taxes on trades in all, or certain types of, securities (equity, debt and their derivatives), with taxes generally based on the market value of the shares being exchanged. Brazil, China, Hong Kong, India, Indonesia, Italy, Singapore, South Africa, South Korea, Taiwan and the UK, for example, all tax purchase and/or sale of company shares. India is an example that also taxes equity futures and options.  Bank transaction taxes (BTTs): taxes on deposits and/or withdrawals from bank accounts, usually a percentage of the deposit or withdrawal. (These have been most prevalent in Latin America and Asia, and often introduced in the wake of financial crisis). While BTTs are easy to implement and often offer up a large tax base, the tax burden may not primarily fall on financial institutions but is likely to fall on their customers. As such, BTTs are often described as a (potentially regressive) form of consumption t a x.

Both security transactions taxes and currency transaction taxes are the taxes that governments and CS Os have most frequently been promulgating in order to raise revenue from the financial sector and possibly also to help regulate financial markets’ volatility.

Review of evidence: how these policies impact inequalities and under what conditions With electronic banking, FTTs are relatively easy to implement. Currently, more than forty countries have operated an FTT at one time or another raising over $40 billion. The following table provides some examples.

Country Type of FTT Features Brazil FTT on equity issued A bank debit tax (known as CPMF) was introduced in 1997 at an initial rate of abroad, loans, forex 0.2%, with the rate increasing to 0.38% in 2002. Revenues were earmarked to fund and capital inflows to healthcare, poverty and social assistance programmes. The CPM F collected nearly stocks and bonds US$20bn per year. It was discontinued in 2008 after the Supreme Court ruled that markets earmarking was unconstitutional. Brazil now has a variety of other FTTs, including a tax on equity issued abroad, loans and capital inflows to stock and bond markets. It is also one of the few countries with a tax on currency transactions (with a higher rate on short-term forex). However, many currency transactions, such as those for exports, are tax-exempt. Rates of Brazil’s FTTs have varied, with changes made in 2008/9 in response to the global financial crisis. France FTT on stocks With discussions on-going about a European-wide FTT, France unilaterally passed its own legislation in February 2012. Its FTT applies to trades in shares, or similar securities, issued by companies whose registered office is in France and whose stock market capitalisation exceeds 1 billion euros. The rate at implementation was 0.2%, but with an increase in 2017 the rate now stands at 0.3%. The tax only applies to transactions that result in effective ownership and excludes purchases and sales carried out within the same day, meaning high frequency trades are excluded. This exemption of intra-day transactions has greatly limited its yield. Though the legislation includes a separate provision to tax some high-frequency trades (at 0.01%) it has been easy to avoid and has produced almost no return in practice. Sweden FTT on equity In effect from 1984 to 1991, Sweden’s FTT is often cited as proof that FTTs don’t securities work. However, it appears its problems were related mainly to design flaws. The equities tax was only levied on trades conducted through registered Swedish brokers, making it easily avoidable by using non-Swedish brokers. (Much of the trading of Swedish stocks moved to British brokers). A tax on fixed-income trading activities resulted in a shift to other financial instruments not subject to the tax, such as corporate loans and swaps. UK FTT on stocks UK stamp duty, charged at a rate of 0.5%, falls on the purchase of shares in UK- registered companies wherever they are traded in the world. The payment is connected to the legal transfer of ownership and therefore is difficult to avoid. It raises a modest amount of revenue (less than 1% of total tax revenues). Administrative costs of the tax are very low. As in France, there are notable issues with the significant value of transactions that are not taxed because they do not require a change of ownership in the underlying share (high frequency trading activities and intermediaries trading a variety of derivatives instruments).

Many other countries, additional to those explored in the table, have their own national FTTs including countries such as Argentina, Belgium, India, South Africa, South Korea and Taiwan. All of these countries maintain taxes on trade in stocks, with some having other types of FTTs on other transactions.

At the G20 summit in 2011 Argentina, Brazil, France, Germany and South Africa all declared their support for a global financial transaction tax. Additional countries that have, at various points, come out in support of an EU-wi de or global financial transaction tax include: Austria, Cuba, Estonia, Finland, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Spain and Venezuela. The FTT was also endorsed in 2011 by 1,000 leading economists, including Nobel prize winners Joseph Stiglitz and Paul Krugman.

Opposing countries to a global financial transaction tax have included Canada, China, India, the UK and USA. Most hedge fund managers also fiercely oppose all kinds of financial transactions taxes, as does the Asia-Pacific Economic Cooperation Business Advisory Council and the Confederation of British Industry, for example. The IMF has, in the past, opposed financial transaction taxes. However, in 2010, IMF research presented to the G20 looked at various taxation options: a bank tax, a Financial Activities Tax (FAT) and a financial transaction tax. Although the report did not support financial transaction taxes, it did not dismiss them either. The IMF’s research and bias in this area have been called into question, including by its watchdog group, the Independent Evaluation Office.

The evidence of, and the opinion on, the impact of such taxes is mixed. The taxes that have been introduced have never been set at so high a level as to show clear positive effects, in terms of high levels of revenue generation and significant impact on the nature and volatility of trading itself. Similarly, evidence of negative effects, from a high rate being set that has then damaged economic performance, has not been forthcoming. Given this uncertainty, their overall impact may be limited. However, the main argument for an FTT is liable to be its capacity to put intervention into the financial system onto the political and policy agenda and to mobilise constituencies behind this. It can be seen to be potentially progressive; it can be linked to redistribution and to funding of what are redistributive measures; it raises the character and functioning of the financial system, not least by its needing to specify which transactions should be targeted, why and at what level, and with what effects. It also has the potential to open up other, arguably more powerful, policies for influencing the impact of finance upon inequality.

Advice for practitioners interested in undertaking policy research, advocacy and campaigning in this area Working on issues related to the finance sector is not going to be an easy option. The scale, scope and complexities of the sector mean considerable technical expertise is required to develop appropriate policy proposals. It is also likely to mean considerable policy research is required before any proposals and strategies can be developed. It would be highly advisable to seek out specialist partnerships with academics or think tanks that have researched financialisation and finance sector regulation and taxation aspects. Relationships with insiders, or former insiders, may also be highly valuable to advise on the complexities of financial markets and financial transactions.

The following is a short summary of some relevant issues for teams to consider in relation to developing policy proposals and advocac y strategies in this area.

Investigate the existing scope and nature of taxation of the finance sector It is important to be aware of any existing (or prior) financial transaction taxes, whether on bank transactions, currency exchange, share transactions or any other financial transaction type. If tax rules already exist (or were previously implemented), you will want to assess the impact of the legislation: what revenue has been raised; what has been the impact on the volume, value and nature of trading; how is the tax being collected; what administration costs are involved? It is also important to look at whether traders are able to avoid tax by using loopholes in the legislation and to gather information on the level and cost of avoidance of any financial transactions taxes in place. Research in this area may already be available if academics or think tanks in country are investigating the various impacts of the finance sector. If not, new specialist research partnerships in this area could be developed.

Consider the types of financial transaction taxes that would be most relevant Many groups are already advocating with partners for national tax policy reforms. Some teams may have included a financial transaction tax in their package of policy recommendations; however, many are likely to have omitted this complex area. This gap could be filled with some focused work. The most important aspect to consider is what type of tax would be appropriate to target speculative financial transactions at the national level in your country. (This is not to say that global FTTs are not important, just that advocacy in this area will be necessarily outside the remit of country teams).

A useful place to start scoping is to look at the potential for a share transaction tax in your country. These are a common type of financial transaction tax in use in different countries at present, particularly where stock markets are well developed. It would be useful to scope out the potential for this type of tax before other FTTs, looking at: how share transactions are conducted, how the tax could be applied and administered, who would bear the burden of the tax and the potential revenue that might be raised. Countries with nascent stock markets may find this less relevant given the importance of properly establishing the stock market first, and its role in raising important finance for development purposes. In some locations there may also be opportunities to consider a region-wide FTT. This is clearly the case in the European Union (where consideration by the European Commission and Parliament has been underway for some years). It may also be a relevant issue for other regional or sub-regional economic groupings.

One aspect of FTTs that has been difficult to successfully address is that of high frequency trades and trading in various derivative instruments. This is certainly the case in the UK, where the shares transaction tax (stamp duty on shares) has existed for many years and where there is already analysis about the cost of loopholes as a result of the design of this particular tax. This does not mean adopting a policy proposal in support of share transaction taxes is worthless. It mainly implies there are likely to be second stage options for advocacy, when its effectiveness and coverage can be properly assessed. Some European countries are developing legislation in relation to the taxation of derivatives instruments. These are on-going processes than can be observed. When viable tax mechanisms are demonstrated in this more complex area, more recommendations can then be incorporated into tax advocacy work.

As with all taxes, those that pay them will object and are liable to campaign against them on grounds of pro- market ideology, individual freedom, and the vices of an unnecessarily bloated state. So it has to be worth the effort in campaigning in terms of revenue raised and capacity to argue against ill effects. This can only be assessed by examining country-specific conditions, in terms of scale and scope of financial markets, whether taxes can be evaded or avoided (asset/currency trading may not even take place within national jurisdiction), and whether speculation is the primary motive (e.g. via foreign purchase of domestic assets, housing or shares for example, as opposed to greenfield investments). If a financial transaction tax is deemed unviable for whatever reason, there are other options such as a ‘tax on non-transactions’ that could be explored. Such a tax would be applied to corporations that hold large liquid reserves, possibly for speculative purposes. The option of a non- transaction tax can also be considered.

Adopt benchmark rates for your proposed financial transaction taxes It is not possible to offer a specific blueprint here for a suitable rate. What is clear is that rates vary between countries and also, due to the nature of the transactions, need to set at a very low level. The Robin Hood Tax Campaign (a specialist coalition) conducted a review of the various FTT rates in existence in 2012. It found that rates are mos t often less than 1% (e.g. Argentina – 0.6%; Indonesia – 0.1%; Malaysia – 0.5%; Pakistan – 0.15%; Turkey – 0.2%). Some countries operate with two tax rates, or two types of FTTs, (e.g. Belgium levies 0.07% on corporate and government bonds and 0.17% on stocks; China levies 0.5% or 0.8% on bonds depending on the transaction type).

Only a small number of countries are cited as having rates that pass 1%. Brazil, for example, has charged 1.5% tax on equity issued abroad as well as on bonds, and 2% on capital inflows to stocks and bonds markets. Finland imposes a tax of 1.6% on the transfer of shares in Finnish companies (and a higher rate of 2% if share transactions concern Finnish housing companies and real estate companies).

Rates also fluctuate. Brazil has implemented a number of adjustments to tax types and rates over the past decades. In France the proposed rate for the taxation on share transactions was originally 0.1%. This was raised to 0.2% before implementation and raised again to 0.3% within 5 years of operation.

There is no right answer to setting a suitable rate. It may be a matter of starting at a very low level to gain broad acceptance of your proposal, particularly from actors within the finance sector many of whom are likely to strongly resist any taxes proposed. Once any tax is implemented it will come under regular review as the Finance Ministry pursues its domestic resource mobilisation strategy. Therefore, there are likely to be opportunities to advocate for an increase in the rate on an on-going basis. If the measure is successful at raising revenue, and is relatively simple to implement, then it could also be the basis for campaigning on the extension of the use of financial transaction taxes to other types of transactions.

Prepare to link your proposal to the funding of some redistributive measures It will strengthen your proposal if you can link your forecast of potential revenue raised with a particular redistributive measure. Research teams may have their own (or a partner’s) research costing the implementation of a social policy measure. Given the revenue raised may not be very high this may be a costing for a very specific activity – such as decreasing pupil-teacher ratios to meet a particular target in schools, or implementing a new expansion plan to provide universal pre-primary education, or e xp a nding the coverage of key medical staff across the country. Any link you can make to demonstrate the importance of revenue raising, even if it represents a small amount of the overall tax take, is very useful.

However, this does not imply advocating for ring-fencing the revenue raised. Although it may appear attractive to ring-fence a tax for particular goals, this strategy can backfire, as financing can become dependent on one fluctuating source. (Fluctuations of FTTs can be a major issue, given the volume of share transactions can change significantly throughout the period, and aftermath, of a financial crisis). Ultimately a stronger and better position is that services such as healthcare and education should be funded in response to need, and at a level that is determined independently of any earmarked revenue raised. As such, advocacy to reform tax policies, and generally increase tax revenue raised from progressive sources, is the most important concern.

References

Cited References

Capelle-Blanchard, G. (2017) “The Financial Transaction Tax: A Really Good Idea”, University Paris 1 Panthéon-Sorbonne & Labez ReFi, Presentation to the Scientific Advisory Board of the Autorité des Marchés Financiers (AMF) in 2015 (Article updated in October 2017), file:///C:/Users/Bf/Desktop/Local%20Documents/Documents/201710_Etude_TTF_VA.pdf

Chowdhury, A. (2016), “Financing Social Protection Through Financial Transactions Taxes”, Social Protection in Action: Building Social Protection Floors, ILO Social Protection Department, Country Note Series, August, http://www.social-protection.org/gimi/gess/RessourcePDF.action?ressource.ressourceId=53855

Epstein, G. (2005) “Introduction: Financialization and the World Economy”, in G. Epstein Financialization and the World Economy, Cheltenham: Edward Elgar.

Robin Hood Tax (2012) “Financial Transaction Ta x: M y t h -Busting” http://www.robinhoodtax.org/sites/default/files/Financial%2520Transaction%2520Tax%2520- %2520Myth%2520Busting.pdf

Tridico, P. and R. Pariboni (2017) “Inequality, Financialization, and Economic Decline”, Journal of Post Keynesian Economics, forthcoming, https://doi.org/10.1080/01603477.2017.1338966

Key Readings

Bayliss, K., Fine, B. and Robertson, R. (eds) (2017) ‘Special Issue on the Material Cultures of Financialisation’, New Political Economy, vol 22, no 4.

Fine, B. and Saad Filho, A. (2017), ‘Thirteen Things You Need to Know about Neoliberalism’, Critical Sociology, vol 43, no 4-5, pp. 685-706

Lysandrou, P. (2011) “Global Inequality as One of the Root Causes of the Financial Crisis: A Suggested Explanation”, Economy and Society, vol 40, no 3, pp. 323-44.