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).