Monday, June 01, 2009

Bernard Kouchner Calls for Currency Transaction Tax

The French foreign minister surprised his audience, and not least the British, in the annual meeting of the Leading Group on Innovative Finance for Development, by proposing to implement the Currency Transaction Tax (CTT).

"I promise you, and our country, France, is ready to assist a pioneer group of States in applying this type of tax which was already adopted in our parliament in 2001. So it is possible to implement such a measure, which could perhaps be applied to the European market initially." - (English communiqué is found here)

The comment went around like wildfire in the French press, where the finance minister Christine Lagarde, politely replied in Le Monde that the tax "isn't currently being investigated", while the minister for development Alain Joyandet supportive of the tax said on the RFI radio that the tax would bring in an extra $30 to $60bn in additional annual resources to meet development targets.

The proposed tax would apply to all currency transactions in participating currencies at a rate of 0.005% of the value of the transaction, or half a basis point. It is a market that has a daily estimated volume of $4tr (yes - trillions), while the last BIS estimate from 2007 places the volume at $3.2tr. This by all standards is an enormous tax base.

Banks of course will argue that they are already taxed on their overall profits, and therefore taxing currency (or for that matter any financial transactions) is taxing twice. This is besides the point, as taxation needs to apply where taxable rents are found, and taxation applies companies already at different stages.

Certainly a tax of $50bn would not just eat to the margins of the banks, it would be passed on to their clients who once again are not retail customers (making up only 2%), but hedge funds and other institutional investors. Taxing hedge funds especially should be seen as a good effort as some 70% of them are placed in offshore secrecy jurisdictions, and thus offer avenues for tax evasion.

There are at least three good reasons to support the CTT:

- Taxing currencies increases the transparency of the single biggest financial market in the world, forcing regulated settlement houses to be established and ending the opaque Over the Counter (OTC) trading. If information will be shared with tax authorities, it can be used as a proxy for spotting suspicious transactions ranging from criminal activities to tax evasion.

- If the tax raises an extra $50bn while mainly appying to the speculative markets it should be seen as an equitable one, in line with the redistributive function of taxation. Furthermore, if money is then given for developing countries as is promised, it would help ongoing Millennium Development Goals programmes as expendture "earmarking" is for a just cause.

- The CTT would open the road for further taxes in the financial sector, where we wholeheartedly support much wider financial transaction taxes, which could be used in every country to monitor the financial markets and raise domestic revenues. A bank transaction tax called the CPMF raised $20bn in Brazil alone, at a rate of 0.38% excluding the stock exchange, movements between two accounts of the same person, and social security benefits. Unfortunately the tax was voted down in December 2007, due to opposition's stance against it. To cover the shortfall the government raised other taxes in the financial sector, and reduced spending.

The CTT is often still seen as a Tobin Tax, which relates to another originally Keynesian idea of sanctioning "herding" behaviour in markets where traders follow a "rally", which led James Tobin to originally propose the tax on currency transactions at a rate of 1%. It is this idea that Mme. Lagarde is suspicious of, and rightly so as when herding occurs better measures (such as capital controls, or obligatory deposit requirements) can tackle the issue.

The CTT has the double function of raising revenues and improving regulation of financial markets through transparency. It is this lack of transparency that largely led us to the current financial crisis, and has contributed to previous currency crisis as bubbles build-up in secretive off balance sheet vehicles, and structured finance thrived in secrecy rather than its capacity to manage risk. Therefore, efforts towards taxing currency transactions should be supported.


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