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Time for Government to support a Financial Transactions Tax

As the international economic chaos of the past few years has shown, the world is now increasingly linked via millions of legitimate, speculative and opportunistic financial transactions. Similarly, global currency trading increased sharply throughout recent decades. It is estimated that a very high proportion of all financial transactions traded are speculative which are completely free of taxation.

Occasional insights are provided by surveys, the most comprehensive of which is provided by the Bank for International Settlements (BIS) Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. The most recent of these was conducted in April 2016 and published in late 2016. The data covered 52 countries and the activities of almost 1,300 banks and other dealers.

Relating to foreign exchange transactions, the key findings from the report were:

  • In April 2016 the average daily turnover in global foreign exchange markets was US$5.1 trillion; a marginal decline on to that recorded in 2013 but an increase of more than 300 per cent since 2001.
  • The major components of these activities were: $1,652bn in spot transactions each day, $700bn in outright forwards, $2,378bn in foreign exchange swaps, $82bn in currency swaps, and $254bn in foreign exchange options and other products.
  • 64.5 per cent of trades were cross-border and 35.5 per cent local (within countries).
  • The vast majority of trades involved four currencies on one side of trades: US Dollar (88% of all foreign exchange trades), Euro (31%), Japanese Yen (22%) and Pound Sterling (13%).
  • Most of this activity occurred in the UK (37% of all foreign exchange trades) and the US (19%). EU member states, excluding the UK, accounted for 11 per cent of all foreign exchange trades ($697bn per day).

Relating to interest rate derivative transactions, the key findings from the report were:

  • In April 2016 the average daily turnover in global interest rate derivative markets was US$2.7 trillion; this has increased by more almost 450 per cent since 2001.
  • The major components of these activities were: $653bn in forward rate agreements, $1,859bn in interest rate swap transactions, and $166bn in Over the Counter (OTC) options and other products.
  • Half of transactions were conducted in US$, one-quarter in Euro and 9 per cent in Sterling. Most transactions originated in US (41%) and UK (39%).

The Irish Central Bank contributed to the BIS report providing specific data for activities based in Ireland. They found that in April 2016:

  • The estimated daily foreign exchange turnover for Ireland was US$2.2bn.
  • The estimated daily turnover in interest rate derivative markets in Ireland was US$1.1bn.
  • The importance of Ireland in both these sectors declined between 2013 and 2016 as a result of trading decreasing and growth in other trading locations.

Transactions in these markets represent a mixture of legitimate, speculative and opportunistic financial transactions. Estimates continue to highlight that a very large proportion of these activities are speculative, implying that large and growing amounts of these transactions make no real or worthwhile contribution to economies and societies beyond increasing risk and instability. Taken together, the daily value of international trading in foreign exchange and interest rate derivatives markets is more than 25 times the annual GDP of Ireland, almost three times that of the UK, and between 40-50 per cent of annual GDP in the EU-28 and US. On an annualised basis, Irish based trading in foreign exchange markets is equivalent to 263 per cent of GDP while trading in interest rate derivatives are equivalent to 132 per cent of the annual value of GDP.

Social Justice Ireland regrets that to date Government has not committed to supporting recent European moves to introduce a Financial Transactions Tax (FTT) or Tobin Tax. The Tobin tax, first proposed by the Nobel Prize winner James Tobin, is a progressive tax, designed to target only those profiting from speculation. It is levied at a very small rate on all transactions but given the scale of these transactions globally, it has the ability to raise significant funds. In September 2011 the EU Commission proposed an FTT and its proposal has evolved since then through a series of revisions and updates.

The EU initially proposed a tax rate of 0.1 per cent (one tenth of one percent) on the trading of bonds and shares and 0.01 per cent (one hundredth of one percent) on the value of derivative agreements. The rates proposed were minimums as countries could set higher rates if they wished. The proposal was also comprehensively designed such that it captured all trades involving any EU registered entity, and all trades involving any EU issued securities. The initial proposal anticipated an annual EU-wide FTT income of between €30bn-€50bn per annum.

The subsequent development of the FTT proposal has seen slow progress at EU level. While between 9 and 11 member states have signalled a willingness to implement the proposal, the precise nature of the tax and breath of the tax base has remained under discussion. Ireland is one of the EU member states that has not, as yet, signalled an intention to implement the tax. However, it has not impeded its development under the enhanced cooperation mechanism.

EU debates are currently focused on the FTT tax base with proposals to narrow it to shares only competing with alternative views focused on retaining a wide base across shares, bonds and derivatives. There is also a considerable financial lobby working to encourage a dilution of the initial broad EU FTT proposal. The scale of this initiative is understandable, given that the tax would most likely reduce the commissions and profits associates with the speculative transactions these financial firms engage in.

However, policy makers need to be reminded that the core argument for these taxes is that they are in the broader interest as they dampen irrelevant and unnecessary financial speculation and thereby underpin the stability of European states. For societies an FTT is a win-win; less needless financial speculation and more state revenue.

Over the past few years a group has emerged in Ireland to support the adoption of the FTT. (Social Justice Ireland is a member of this group). In our opinion, the tax offers the dual benefit of dampening needless and often reckless financial speculation and generating significant funds. A report from the Nevin Economic Research Institute estimated the likely revenue yield from the FTT’s adoption by Ireland. Taking account of the need for Government to abolish stamp duty on shares, the report estimated a net revenue yield of between €320m and €350m per annum.

We believe that the revenue generated by this tax should be used for national economic and social development and international development co-operation purposes, in particular assisting Ireland and other developed countries to fund overseas aid and reach the United Nations Overseas Aid target. According to the United Nations, the amount of annual income raised from a Tobin tax would be enough to guarantee to every citizen of the world basic access to water, food, shelter, health and education. Therefore, this tax has the potential to wipe out the worst forms of material poverty throughout the world.

Social Justice Ireland believes that the time has come for Ireland to support the introduction of a Financial Transactions Tax.