Financial transaction tax: The good, the bad and the irrelevant

By Wilberne Persaud, Financial Gleaner Columnist

In September 2011, the European Union proposed a financial transaction tax (FTT) covering its 27 member states.

The tax was meant to "be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts, at a rate of 0.01%. This could approximately raise €57 billion every year. The commission has proposed that the tax should come into effect from 1st January 2014".

The commission advanced two reasons for the proposed policy. First, to ensure the financial sector made a fair contribution during fiscal consolidation - read fiscal austerity - in the member states. This idea embodied the 'quid pro quo' notion: the financial sector played a big role in the origins of the 2008 economic crisis; catastrophic results were avoided by governments' and European citizens' provision of taxpayer-funded bailouts to support the sector - it is fair, equitable.

coordinated framework

Second, the commission argued that "a coordinated framework at EU level would help to strengthen the EU single market ... [since] 10 member states have a form of a financial transaction tax in place. The proposal would introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU. This will help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises".

Another, by no means insignificant motivation was the commissioners' view that the financial sector was undertaxed relative to other sectors. Finally, the hope was that the new measure would "discourage financial transactions which do not contribute to the efficiency of financial markets or of the real economy".

Readily predictable, given its role in global finance, the United Kingdom challenged the legality of a January 2013 decision of the council to authorise a common framework for the FTT and "the scope and objectives of the initial commission proposal, claiming that the council decision authorised legislation has illegal extraterritorial effects, and is not respecting the rights of non-participating member states".

Fact is, FTTs are no newly minted governmental intervention. Their objectives, defined and articulated by proponents, however, are not always the same.

Former Finance Minister Audley Shaw indicated he was urged in 2010 to implement but rejected a similar proposal. As it stands, Minister Phillips clothed the proposal purely, it seems, in the garment of revenue collection. Furthermore, it targeted only withdrawals from financial institutions. It is easy therefore, to perceive this as further imposition of IMF austerity orthodoxy on an already overburdened Jamaican taxpayer.

None of the EU-type reasoning appears to have been considered.

Actually, if any economy has just cause for an FTT it is Jamaica, whose citizens and Government provided in excess of $140 billion in taxpayer support for savers, the insured and pensioners as a result of the mid-1990s indigenous financial-services sector crash.

short-lived memories

Memories, short as they are, perhaps we forget savings dissipated, and the public-debt explosion in that episode. Burdening only withdrawals - tax-paying consumers and producers - and justifying it purely as a revenue measure smacks of regressive, multiple taxation on the already compliant.

Controversy surrounds whether the tax as proposed was regressive or progressive. It seems regressive but that debate may be irrelevant.

Jamaicans do avoid and evade taxes. Even the casual observer of common lifestyles knows we should expand the base. So a tax on withdrawals from the banking system would be efficient; effectively costless collection for the Government. It was likely, however, to have had bad, unintended consequences. Any flight to cash that broadens informal sector economic activity can't be a good thing.

Had the Government proposed implementing an FTT as the European Union did, clearly the revenue intake could have been impressive. Opposition would perhaps have been louder. Remember, we've already had JDXs. The clout of those objecting would also have been much greater.

This is the time of year for kite flying and, whether intended or not, popular comment says it was part of an Easter egg hunt. This may be unkind.

Yet, expenditure reduction and/or increased revenue collection is today imperative. But who pays? Perhaps next time around we should consider a rationale more closely matching the European Union's objectives in devising our FTT. It must be tabled early, fully discussed and agreed by all stakeholders.

There's no avoiding the inevitable. The debt-to-GDP overhang is unsustainable; failure to contain it shall shatter confidence, placing us right back on the treadmill creeping with devaluation.

Wilberne Persaud is an economist.wilbe65@yahoo.com