Friday, January 20, 2012

A Financial Transactions Tax: Inefficient or Needed Systemic Reform?

That's the title of a new paper looking at the pros and cons of the European Union's efforts to get a financial transactions tax up and running. We haven't read the whole paper, but here's (a slightly shortened version of the abstract:
IMF staff reports . . . concluded that a tax would reduce the efficiency of capital markets, and raise the cost of capital. The efficiency frameworks used in the staff reviews were unduly narrow. Markets work best when there are strong links between market trading and real economic activity. Of late, these links have become increasingly tenuous and latent market and financial system risks are mounting. Carefully calibrated legal and tax responses are required to change market behaviour. Such a tax as part of an integrated policy framework would reduce short-term momentum trading and promote longer-term investment that would better reflect underlying economic fundamentals. So we argue the European Commission is correct in proposing to adopt such a tax.
In other words, an FTT seems like a good idea. Now take a look at that bit in bold. It's rather like something that John Maynard Keynes said a while ago, in his characteristically outdated but still eloquent prose. Compare the two bits in bold, and realise that the two sections are saying someting very similar:
"The divorce between ownership and the real responsibility of management is serious within a country when, as a result of joint-stock enterprise, ownership is broken up between innumerable individuals who buy their interest today and sell it tomorrow and lack altogether both knowledge and responsibility towards what they momentarily own.

But when the same principle is applied internationally, it is, in times of stress, intolerable - I am irresponsible towards what I own and those who operate what I own are irresponsible towards me. There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations between men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation."
And in light of all that's happened in the world in the last few years, who could argue?

Read a whole lot more about Keynes, in the context of tax, transparency, and 'remoteness between ownership and operation' here.


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