FINANCIAL TRANSACTION TAX (FTT)
FTT is a levy placed on specific types of monetary transactions for a particular purpose, mostly associated within the financial sector which does not include consumption taxes paid by customers. It is considered on a broad range of financial instruments like stocks, bonds, currencies and derivatives. The key to FTT is to raise money for governments but also its other purpose was to prevent excessive speculation by unprofessional and uniformed traders during the 1930’s.
The core purpose of FTT whilst understanding that every financial transaction has its own purpose was to:
Curb speculation without discouraging hedging
Whilst speculation takes both long and short positions without prejudice it is noted that it does have a part to play in preventing asset inflation and price bubbles in the market. It is also true that hedging is necessary for stability therefore tax schemes in general aim to tax speculation trading which is seen by many as gambling but at the same time not affecting or interfering with hedging. The core differences note that hedging protects investment, whilst speculation takes on additional risk investors could avoid. Hedging is therefore seen as managing risk whilst speculation needs to rely on taking risk for profit.
Greater fairness and equitable tax collection
The Automated Payment Transaction Tax (APT Tax) is seen to tax the broadest range of transactions tax, as instead of applying it through the tax rate structure, a flat rate APT is applied to transactions so the tax is proportionate based on volumes traded.
Curbing volatility of financial markets
John Maynard Keynes believed that speculators in the market place creates volatility and generally most investors and governments don’t like erratic volatility or market shocks. Therefore, it was seen that if speculation could be curbed then volatility could be prevented. This issue has many arguments mainly due to the meaning of what a speculator is in the market place but nevertheless volatility can cause uncertainty in the market place, so curbing it is seen as core to stability.
Lower risk and potential to tax evasion than alternative methods
It is believed by some economists that FTT lowers tax avoidance than alternatives proposed within the financial sector. The APT as described above has used modern technology efficiently and automatically for collecting taxes as it is settled through the electronic banking payment system. This makes it less prone to tax avoidance and discourages tax evasion due to its automated nature of collection.
The FTT model was originally conceived by the famous economist John Maynard Keynes in 1936 and in 1964 an early version of FTT was imposed by way of stamp duty at the London Stock Exchange. The tax was paid for the official stamp on the legal document needed to confirm the purchase hence why it’s called stamp duty. In the US, the revenue Act of 1914 was implemented as a transfer tax on all sales of stock. The revenue act was 0.2% of the transaction value it increased during the great depression and eventually ceased in 1966.
It was during the great depression that John Maynard Keynes suggested that FTT should be wider and he believed that putting a levy on transactions tax could be applied to dealings on Wall Street because he argued excessive speculation of financial traders increased market volatility. Post the end of the monetary policy era that maintained exchange rates on currencies (Bretton Woods System), in 1974 a man named James Tobin, building on the work of John Maynard Keynes, suggested a more specific currency transaction tax for stabilising global currencies.
During the 1990’s, derivatives along with other methods of trading i.e. swaps, could in theory provide opportunities for institutions a tangible way of evading tax. It was during these times and beyond that policy makers and regulators struggled to keep pace with the growing and increasingly complex financial engineering used by traders and finance houses, to either avoid or reduce tax on financial market participation. This became a real problem for regulators and policy makers as how could a tax be designed and implemented, which could take into account all the methods that investors could adopt for changing trading activity to potentially avoid taxation. The other issue that regulators and policy makers had to consider was the real meaning of market speculation, some argued it created volatility, yet others argued it created liquidity.
Most proposals to avoid this problem targeted clear speculative high volume short term trading methods where positions are held for seconds to hours, as these transactions were considered unable to change exposure or cashflow expectations. Edgar Feige proposed an automated payment transaction tax as a small flat rate tax on all financial transactions. It is clear by looking through the history of financial markets that most Financial Transaction Tax ideas and proposals respond to specific financial crisis in history.
In recent times with the financial crises of 2007-2008 this prompted organisation, governments and economists to re-think and examine the concept of FTT and its various forms. This led to new forms of financial transactions taxes being proposed such as the EU financial transaction tax. The public outcry of this crises and the causes of it had a major impact on politics, regulation and legal issues surrounding financial trading. The public thinking and the media coverage pointed to irresponsibility, accountability and greed by financial institutions that led to mass government bailouts using public paying taxes. Within two years of this crises new policies had been introduced such as Basel 2 and Basel 3 frameworks which required institutional reporting that could help differentiate between hedging from speculation.