Jim Stewart: The reaction to the proposal from the European Commission, France and Germany, for a financial transaction tax (FTT) has produced a predictably hostile reaction from the financial sector and its apologists. This is disappointing, but not wholly unexpected. It reflects an inability or unwillingness to learn from the Global Financial Crisis (GFC). The FTT concept is not new: as pointed out by Philippe Doustte-Blazy, there are over 40 such taxes already in place. What is new is that such taxes would be imposed on all financial transactions rather than, as in the current position, on a small number, such as the cash market for equities.
There are compelling reasons for the introduction of an FTT, regardless of the revenue generating potential of such a tax. We know from the GFC that those jurisdictions with a bloated financial sector suffered greatly in comparison to those with more balanced and hence more sustainable economies. Insofar as FTT would serve to restrict and reduce the size of the financial sector and the associated ‘crowding out’ of the productive wealth generating sectors, economic growth is more likely to resume and to be more stable through time.
We also know that those jurisdictions in which short-termism does not have primacy do better than those in which short-termism is the prevailing strategy. Insofar as an FTT would serve to act as a disincentive to short-termism, economic growth prospects would improve. Economies would be on a sounder footing for long-term sustainable progress.
Despite having large cash balances, global firms are not investing. The volatility that prevails in current financial markets helps create an environment of massive uncertainty for managers. Furthermore modern financial strategies, for example by hedge funds, thrive and depend on the creation of uncertainty. Thus managerial decisions dedicated to wealth generating activities are restricted, and indeed made to appear irrational. Insofar as an FTT would serve to curb volatility, uncertainty would be reduced and investment would be more likely in the wealth generating sectors.
Finally there are those who incredibly claim that an FTT would impair the operation of “efficient” markets. The belief that markets were “efficient”, held especially by regulators, was a key part of the development of the GFC (see Turner Report pp. 39-40). It is generally agreed that an FTT would reduce volumes traded in financial markets. While the relationship between volume traded and volatility in financial markets is mixed, there is much stronger evidence for a positive relationship between speculative bubbles and volumes. Recent financial history has shown that the growth in volumes and values of derivatives was a central part of the GFC (see Fig. 3.1 Financial Crisis Inquiry Report). Thus, irrespective of revenues raised, the introduction of a FTT would have beneficial effects on the stability of financial markets.
It is time financial markets returned to becoming the servant of wealth creators rather than their inhibitors.
Dr Jim Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.
He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).