Thoughts on the Financial Transactions Tax
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Thoughts on the financial transactions tax Carolina Coelho da Silva is a Senior Associate at Raposo Bernardo, Lisbon axes always create interesting and vivid discussions as, We cannot say it is a surprise, considering the financial crisis let’s be honest, no one really wants to pay them. Even that we are living through, and the need of funds by the Tthe existence of taxes is subject to different opinions. governments. The issue is even more important when we are talking of a levy tax on financial entities such as banks and insurance After all this financial crisis, considered by some as the companies, especially if we consider that until now it was worst financial crisis since the 1930’s Great Depression, was customary that these entities benefited from tax exemptions, caused by valuation and liquidity problems due to an over and were not subject to a specific tax. optimistic and risk-addicted financial institutions. When the so-called “bubble” exploded the result was the collapse of Until recently a lot has been said about financial transactions large financial institutions, the bailout of banks by national tax scrutinizing all the pros and cons of this “new tax”. governments and downturns in stock markets all around the world, particularly in Europe. The idea of a financial transactions tax, also called the Tobin tax or even the Robin Hood tax, consists in taxing all financial Therefore, in a Europe deeply affected by the crisis, the need transactions between 0.01 and 0.05 per cent. for changes in order to obtain more liquidity is immense. Suddenly a new tax over financial operation seems to be the Despite the recent discussion of the concept of a financial solution for all our problems. transactions tax, the truth is that the original idea - the Tobin tax - was developed in the 70’s. This tax, named after In a difference from the original Tobin tax the intention of this its creator, the Nobel Prize-winning economist James Tobin, new tax is to tax all financial transactions, not just currency was originally defined as a tax on all spot conversions of one trades, but also including instruments such as financial currency into another (Tobin suggested a rate of 0.5 per cent). derivatives like futures and credit-default swaps. The purpose was to put a penalty on short-term financial round-trip excursions into another currency. This tax would After the European Commission proposal, the discussion was therefore reduce destabilizing currency speculation, and launched between supporters and opponents of the Tobin inhibit speculative cross-border flows in foreign exchange tax. The supporters believe that it could raise a great amount markets. of money that would help the countries to overcome these difficult times. “The consequences would be wider that Also it is felt that those who led us into the crisis should pay the immediately observable effects, for it, as the revenue for such a tax would be helpful to restore as market transactions are not just the government treasuries (the same governments who bailout the banks). Also, the tax exemptions of the financial exchanges of goods or services, but also intuitions have become an issue. We cannot ignore that this contain vital market information” tax proposal has also been called the Robin Hood tax. In short, it was conceived as a small tax on conversions of Those who are against say that market makers will merely one currency into another. In a historic context, the intention change their method of handling risk in any of a variety of of this tax was, after the removal of the gold standard, ways that significantly reduce the volume and total value of to prevent huge swings in currency valuations, reducing transactions. volatility and mispricing. The consequences would be wider that the immediately Forty years later, Tobin tax is again at the top of the political observable effects, as market transactions are not just agenda in Europe. One of the reasons for this is that the exchanges of goods or services, but also contain vital European Commission has proposed a turnover tax on all market information such as prices that are representative financial transactions, varying from 0.1 per cent on stocks to of profits and losses. Thus, the lower volume and total value 0.01 per cent on financial derivatives like futures and credit- of transactions would cause a lack of liquidity, that would default swaps. cripple the economy as companies and entrepreneurs will 30 www.worldcommercereview.com World Commerce Review ■ March 2012 be unable to acquire the necessary funds to enhance their and short term solution, this time of severe crisis should current business or seek other ventures. constitute an opportunity for a careful and critical overview of the financial system. The markets are not national Within the European Union there is also a geographical anymore, but globalized, and the “butterfly effect” should division (think of the historic opposition between France be considered. One should pursue a long-term vision of our and United Kingdom, usually taking opposite sides in the financial system, envisaging a solid and sustainable growth discussion). arising from an economic restart that has learned from past mistakes. France’s government has been very keen on the idea of this new tax, willing to proceed with it in France despite what Regarding a purely legal point a view, the core question the other European members decide. On the other hand, would be around the terms of the enforcement of this tax, and the United Kingdom has been opposing this ‘solution’ since how would governments be able to control all the taxable the very beginning, saying that it would do more harm than operations and the tax evasion? Surely, tax evasion will also good. still be an issue, and the discussion must be extended to this point also. It seems that the idea of a united Europe, or at least the Europe in the eurozone, applying this tax is far from likely. After this financial crisis, and whether the Tobin tax goes forward or not, financial operations will be reinvented and And the question is; is it really that relevant? new instruments pushed by financial engineers, who are always a step ahead. Multiple changes are indeed expected We believe that we do face a grey area, and regardless of in the short-term, but not many will prevail in the long-term, what economists or legal experts may say, the final word is such is the pressure installed to take decisions which are far a political decision. Nevertheless, more than an immediate for being consensual. ■ World Commerce Review ■ March 2012 www.worldcommercereview.com 31.