Taxing Financial Transactions: An Assessment of Administrative Feasibility

Abstract

This Working Paper should not be reported as representing the views of the IMF. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management. This paper considers how a tax on financial transactions could be applied to three broad and partially overlapping categories of financial instruments: (1) exchange-traded instruments; (2) over-the-counter instruments; and, (3) foreign exchange instruments. For each category, the paper examines the factors that would facilitate or complicate the administration of a financial transactions tax, the options for collecting the tax, the types of compliance risks that are likely to be encountered, and measures for mitigating these risks. JEL Classification Numbers: G01, G02, G18, G38, H20, H26, H83

Global Taxes and International Taxation: Mirage and Reality

“…Such taxes may be levied on the sale of specific financial assets, such as stock, bonds or futures whether through organised exchanges or over-the-counter (OTC); they may be applied to currency exchange transactions; or they may be general taxes imposed on a variety of different transactions. Brondolo (2011) lists 23 different types of financial transactions that may be subject to such taxes and, as Table 3 shows, many of these possible tax bases seem to have been used to varying extents by different countries. Other names for similar taxes include speculation tax, global financial tax, financial tax, and financial instruments tax.…”

“…28 Finally, while, as mentioned earlier, not all details of how the EU FTT will work are fully clear, and no doubt many problems will be encountered in attempting to implement this levy in a number of very different countries, the extensive experience that these and other countries have had with related taxes (Table 3) suggests that to say that it will be ineffective and will result in lost jobs and reduced capital flows overstates the case somewhat. As both the IMF (2010) and Brondolo (2011) conclude, the existence of similar taxes in many countries and the similarity of the international aspects of the administrative problems involved to the problems that already exist with other taxes suggest that, although an FTT is indeed unlikely to work perfectly and may well -like most taxes -give rise to some distortions, it can in all likelihood be made to work satisfactorily without bringing ruin to those countries that choose to impose it. Nonetheless, introducing such a cascading tax on the financial sector seems unlikely to make countries better off on balance, given the uncertainty of its stability effects, which appear highly sensitive to the detailed structure of financial markets, and the likelihood that at least some dampening of investment and growth will occur.…”

“…These rates may seem low but if a transaction from one investor to another goes through a broker, a clearing house and another broker it would be taxed six times. Although OTC trading is also taxable, it is obviously much more difficult to enforce the tax on such transactions (Brondolo 2011) so some, perhaps considerable, divergence away from organised exchanges to OTC trading may occur. Even more questionable is the fact that the FTT is supposed to be applied even to transactions outside of the participating EU Member States when one party is taxable under the proposal as well as when the financial instruments traded are issued in participating Member States, although it is unclear how this provision could be enforced in many cases.…”

Investment, financial markets and uncertainty

“…It is, thus, not surprising that the Tobin tax is under consideration to contain the enormous speculative capital flow movements (Tobin, 1978;Brondolo, 2011). to consider the risk aversion of some entrepreneurs, and specifically, study the presence of the depressing effects of non-risky financial investments with known yields on risky physical investments. Despite the high volume of US public debt 8 , US bonds are safe for several reasons: a) the US public sector has never defaulted; b) the fiscal pressure of this economy is low, which permits the possibility of tax increases to finance its public deficit; 9 and c) this high rate of public indebtedness is due to the expansionary policy after the crisis of August 2007.…”

Investment, Financial Markets, and Uncertainty

“…Our approach assumes a negative effect of the US bond yields on accumulation, due to that the Tobin tax is considered to contain the enormous speculative capital flow movements (Tobin 1978;Arestis and Sawyer 1997;Brondolo 2011). 9 The International Monetary Fund estimates the volume of US public debt as 99.33 percent of GDP in 2011 (IMF 2010).…”