Produced by Vaughan Gunson, Tax Justice campaign coordinator

This is a working document, please make suggestions to it by emailing vaughangunson@taxjustice.net

Last updated 18 August 2011.

To download PDF version click here.

A hyper-financialised “bubble economy”

1. In 2008, prior to the global financial crisis, world trade in various financial commodities was 74 times higher than global GDP. Daily turnover for global currency trade as of April 2010 was $4 trillion ($1,460 trillion a year). This speculative activity is destablising the world economy and creating speculative bubbles that ultimately hurt grassroots people.

2. The unprecedented level of financial speculation represents the desire of the world’s super-rich to continue reaping super-profits. To achieve this, governments worldwide have removed all barriers to financial speculation and encouraged a supply of cheap credit by banks. A giant financial casino has been created, where everything that fluctuates in price has attracted the speculators.

3. Since 1984 a priority of both Labour and National governments has been deregulation of the financial sector. This has opened up NZ’s financial markets to international and local speculators, resulting in price volatility and inevitable cycles of boom and bust.

4. The Kiwi dollar is one of the ten most traded currencies in the world. Global speculators have created a highly volatile market. It’s a South Pacific roulette table for the world’s high rollers.

5. Many mainstream economists and politicians around the world have recognized that financial speculation is out of control and needs to be curbed.

Taxing the speculators

6. Profits from financial speculation are currently not directly taxed by the NZ government. This is a yawning gap which must be closed to bring fairness to NZ’s tax system.

7. The only mechanism that could make speculators pay tax, particularly overseas ones, is a tax on the financial transaction itself. There is growing momentum worldwide for Financial Transaction Taxes (FTTs) to be introduced to a full range of financial markets, not just currency markets as proposed by James Tobin in 1972 (the Tobin Tax).

8. The percentage rates that are being talked about internationally for Financial Transaction Taxes are very small, ranging from 1% to as low as 0.05%. There’s a growing consensus amongst tax researchers that a FTT would work best if different rates were set for different financial markets and types of transactions.

9. A Financial Transaction Tax (FTT) would be like GST for the financial sector. In NZ financial services do not currently incur GST. Inland Revenue lists the following financial services as exempted from GST: “dealings with money; certain dealings with securities; provision of credit and loans; provision of life insurance; provision of non-deliverable futures contracts and financial options; the payment and collection of interest, principal and dividends; and issuing securities such as stocks and shares.” The main users of these financial services are rich investors, speculators, banks and other wealthy corporates.

10. Most speculation in financial markets is computer automated, with the time-period between purchase and sale often measured in seconds. A FTT would make High Frequency Trading unprofitable.

Extremely progressive

11. Only the very rich profit from speculation in financial markets, only the very rich shift large amounts of money around via the banking system. FTTs are a progressive form of taxation, as it’s the rich, not the poor, who will be paying the tax.

Substantial government revenue

12. A 0.1% general FTT could raise over $NZ1.6 billion (0.88% of New Zealand’s GDP). Based on the revenue estimates compiled in an extensive 2008 research study by the Austrian Institute of Economic Research. Their statistical estimates factor in a reduction in trade volume resulting from the implementation of the tax, which would discourage speculation. (Source: A General Financial Transaction Tax, Stephen Schulmeister, Austrian Institute of Economic Research, 2008.)

Note: the Tax Justice campaign is advocating, as a first step, the introduction of a FTT on financial markets to replace the revenue lost from removing GST from food. But it would be possible to design an effective system of Financial Transaction Taxes on a range of financial markets, and including bank transactions, which would allow for GST to be phased out altogether.

Easy and cheap

13. Financial transactions in modern economies are overwhelming made electronically via computerized banking system. It would be easy to regulate the banks to collect a FTT. Joseph Stiglitz, former Senior Vice President and Chief Economist of the World Bank, believes modern technology makes FTTs feasible.

14. Tax researcher, Rodney Schmidt, states in a paper presented to the IMF in 2010 that: “All large-value financial transactions go through three steps. First dealers agree to a trade; then the dealers’ banks match the two sides of the trade through an electronic central clearing system; and finally, the two individual financial instruments are transferred simultaneously to a central settlement system. Thus a tax can be collected at the few places where all the trades are ultimately cleared or settled.” (Source: Rodney Schmidt, Notes on the Feasibility and Impact of a General Financial Transactions Tax, 2010.)

Impossible to avoid

15. FTTs collected via the electronic bank settlement process would be impossible to avoid. Capital Gains Taxes (CGTs) are widely recognized as being easy to avoid. Gareth Morgan, while in favour of a CGT for NZ, admits that “Tax dodging on capital gains taxes is simple” (Capital gains tax best way to tackle rot, NZ Herald, 14 July 2011).

16. “Collecting FTTs via centralised settlement systems would also make payment extremely difficult to avoid or evade. Banks themselves created the settlement systems to act as safety nets and minimise risks when trading such huge amounts of money in so doing they have created the means by which FTTs can be captured. This is particularly so for foreign exchange, where 95% of high value trades are settled in one location: the CLS Bank.” (Source: A Big Day for a Tiny Tax: Global Day of Action Toolkit, 2011)

They’ve been around since 1694

17. All of the G10 countries except Canada have levied financial transaction taxes at some time. Of these, the United States, UK, France, Belgium and Switzerland have existing FTT regimes, while the other G10 members only removed the FTTs they had in the 1990s. India, Sweden, Peru, Argentina, Venezuela, Columbia, Brazil, Ecuador, Greece, Finland, have, or have had, FTTs in place over the last decade. In most cases the tax has been collected electronically at the point of settlement with little cost to governments.

18. Britain currently has a financial transaction tax on trading in the London Stock Market. They have a Stamp Duty that’s been in place since 1694, and which is currently charged at 0.5%. The tax is collected on all transactions of UK incorporated companies, whether the transaction occurs in the UK or overseas.

19. Brazil had a ‘bank transactions tax’ in place from 1993-2007. While Peru has had a Financial Transaction Tax in place since 2004, applied to all deposits and withdrawals of funds in Peruvian banks or financial institutions.

20. Prior to the collapse of the stock bubble in Japan in 1989, FTTs raised more than 4 percent of government revenue.

FTT on the $NZ

21. All trade in the NZ dollar, wherever it takes place in the world, has to go through a settlement process which is overseen by New Zealand’s Reserve Bank. A FTT applied electronically at the point of settlement would be inexpensive and easy to do. If there was the political will there is no reason why NZ could not introduce a unilateral FTT.

22. “The Continuous Linked Settlement (CLS) Bank settles 55 % of global foreign exchange transactions. The remaining foreign exchange transactions are settled in the domestic Large-Value Payments System (LVPS) of each country. The LVPS of each country also settles bond, money market, and cash transactions. (Source: Rodney Schmidt, Notes on the Feasibility and Impact of a General Financial Transactions Tax, 2010.)

Money for tacking climate change and poverty prevention

23. A multilaterally applied small percentage financial transaction on currency trades would generate substantial funds for tackling climate change and international poverty prevention. This is the argument being put forward by organisations like Oxfam and 350.org.

24. A global FTT introduced at a rate of 0.05% would, it is estimated, raise US$ 661.1 billion (Source: CIDSE Financial Transaction Tax (FTT) Factsheet, June 2011).

The call for FTTs is growing louder

25. On June 29 this year, the European Commission proposed to put in place a FTT on the European Union’s financial sector by 2014.

26. In November 2007, a regional FTT was adopted by the Bank of the South, after an initiative of Hugo Chavez, president of Venezuela, and Nestor Kirchner, president of Argentina.

27. In March 2010, 1000 economists from 35 countries signed a letter to the leaders of the Group of 20 countries in support of FTTs.

28.  The popular Robin Hood Tax campaign, promoted by Oxfam worldwide, is advocating a multilateral FTT.

29. Barry Coates, executive director of Oxfam New Zealand, is all for a Financial Transaction Tax, so that “taxes on life’s essentials [like GST]” can be replaced “with a tax on socially destructive financial speculation” (“We could replace tax on essentials with one on destructive speculation”, Stuff News, 2/3/10.)

30. German Chancellor Angela Merkel and French President Nicolas Sarkozy are calling for Europe to implement a Financial Transaction Tax.

SOURCES:

Taking the Next Step: Implementing a Currency Transaction Development Levy by David Hillman, Sony Kapoor and Stephen Spratt, Commissioned by The Norwegian Ministry of Foreign Affairs, 2006, http://www.ubuntu.upc.edu/docs/doha/TakingtheNextStep_Introducing%20a%20CTDL.pdf.

Notes on the Feasibility and Impact of a General Financial Transactions Tax by Rodney Schmidt, Principal Researcher, International Monetary Fund, 2010, http://www.imf.org/external/np/exr/consult/2009/pdf/Comment84.pdf.

CIDSE Financial Transaction Tax (FTT) Factsheet, 2011, http://www.cidse.org/uploadedFiles/Publications/Publication_repository/FTT%20Factsheet_CIDSE_2011.pd.

Financial Transaction Tax, Wikipedia, 15 August 2011, http://en.wikipedia.org/wiki/Financial_transaction_tax.

A General Financial Transaction Tax, Stephen Schulmeister, Austrian Institute of Economic Research, 2008.