Tuesday, December 08, 2009

Warwick commission: more support for financial transaction taxes

The Warwick Commission on International Financial Reform has produced a long report, worth reading if you have time (though it's fairly long) which further builds the case for financial transactions taxes (although it has many fine characters involved, it is chaired by Avinash Persaud, who has a strange understanding of what tax havens are).

On financial transactions taxes, it notes they are worth pursuing "to limit short-term and churning activity."

"Banks profit more from high-turnover than low turnover and consequently they are likely to over-invest (relative to a social optimum) in activities and instruments with high turnover and underinvest in activities and instruments with low turnover. If you establish a buy and hold fund you may never meet a banker; if you have the same size fund, but decide to adopt a strategy of turning over the portfolio every week you will find it hard to get to your desk through the throng of bankers offering a ‘partnership’. This is a social externality and the classic economist response is to tax the activity."

Yes. But are FTTs feasible?

"A common reaction to such ideas is that they may be a good, but they are not feasible. However, financial transaction taxes are common – in the U.S., the Securities and Exchange Commission is financed by one – and have been made more feasible through the moves towards centralised clearing and settlement allowing the tax to be collected at a central point through which the majority of trades are flowing, and creating substantial costs to those trying to get round the tax by avoiding central clearing and settlement.

Key features of all of these ideas are a degree of automaticity and the introduction of rules which slow down the growth of balance sheets and prevent them from becoming so large that they pose a systemic risk overhang on the real economy. Issues of systemic risk and optimal size are complex and appear to deserve intelligent discretion, but we fear discretion is too prone to regulatory capture and greater adherence to a set of structural rules will help the financial sector play its due role in achieving sustainable and equitable growth."


Blogger Physiocrat said...

Presumably the aim is to get the economy working effectively again. Whether endless sustained growth is possible or desirable is another matter. There is also a need to prevent the gap between rich and poor continuing to widen, and hopefully it would get less. It seems that growth in recent years has actually widened the gap, since the trickle-down effect has been proved to be a myth.

A further need is to prevent the development of another damaging boom-bust. Obviously there are cycles in the economy but their severity can be reduced.

But how financial transaction taxes could bring about these desirable changes has yet to be explained. People are barking up the wrong tree, methinks. Though I would not mind seeing more people prosecuted for fraud if the charges could be made to stick.

3:02 am  

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