Bruno Jetin,<br />Assistant professor of Economics,<br />Université Paris Nord and ATTAC France<br />email@example.com<br />A Financial Transaction Tax to come out of the crisis and avoid the next one<br />
The legacy of the crisis: a huge pile of public debt... <br /><ul><li>Total OECD government budget deficits should top 7.6% of GDP and public debt 103% of GDP in 2011 compared with 1.3% and 73% respectively in 2007 (OCDE Economic Outlook n° 86, November 2009).
In terms of net borrowing requirements, things are even worse. In 2009, OECD treasuries issued $3500bn in public securities, that is seven times more than in 2007.
So far, investors have been willing to absorb them, but this could change abruptly should investors re-diversify their portfolio as the recovery progresses and debt level continues to rise, pushing interest rates upward.</li></li></ul><li>...At times when resources for the Millennium Development goals and climate change mitigation are still needed<br /><ul><li>The estimation of the cost of the MDG is old: World Bank, 2003. $50-65bn per year.
MDG financing needs can be approximated by the official commitment to reach the 0.7% of GNI.
Current ODA level is 0.3% of OECD GNI. The total OECD resource gap for the years 2012-2017 to reach the 0.7% of GNI would amount to $180bn per year.
The financing of climate change adaptation and mitigation is estimated respectively at $70bn and $140bn per year over the period 2013-2017 of which roughly $100bn would accrue to the OECD countries.</li></li></ul><li>
Who will pay for it?<br />According to a « stylised medium term scenario », (2.6% real GDP growth) the OECD expects:<br />A three-year « fiscal consolidation » equivalent to 1% GDP per year between 2012 and 2014 for 15 OECD countries whose budget deficit in 2011 will be in the range of 2-6%.<br />An additional three-year fiscal effort also equivalent to 1% GDP per year between 2015 and 2017 for the 9 countries whose deficit exceeds 6% GDP in 2011.<br />Among them, the USA, Japan, France…<br />
Not the people...<br /><ul><li>According to the OECD, this unprecedented fiscal consolidation should be met by:
« Efficiency gains », public sector downsizing, « long overdue reforms » to public pension schemes;
A broadening of the tax bases, an increasing indirect taxation (VAT and property taxes), cutting on top personal income tax and lowering corporate income taxes.
This is clearly unacceptable. People will not pay twice a crisis triggered by banks: first unemployment and second reduced income and social rights.</li></li></ul><li>... But banks and financial investors.<br />This is not politically feasible, this will worsen the crisis, and this is not efficient to raise enough money.<br />We need a proposal that curbs speculation and generates a new and vast source of government revenues.<br />What is the best proposal?<br /> The insurance scheme?<br />The fee on large bank balance sheet?<br />Or the Financial Transaction Tax?<br />
The insurance scheme?<br /><ul><li>Under an insurance scheme, risks are pooled or transfered from private to public operators but they are not reduced as such.
A pre-requisite for any insurance scheme is the ability to price risk, which in turn presupposes the ability for the insurer (the regulator) to conduct proper risk assessment of the insured (the banks) and to proceed so at reasonable costs.
This ability seems out of reach for the G20 regulators which lack information and data to understand where the risks actually lie. (FSB & IMF, 2009, « the Financial crisis and Information Gaps »).</li></li></ul><li>The insurance scheme?<br /><ul><li>The Basel II framework bears responsability for this inability of national and financial authorithies to control global finance effectively because bankers are given the extra degree of freedom to assess themeselves their risk exposure.
Regarding revenues, an insurance scheme needs by definition to be pre-funded. Insurance fees are kept aside and would not be reallocated to those global public goods which would reduce the North-South divide, the climate change and fiscal sustainability.
An insurance scheme is a passive measure. Regulators would wait for the next speculative asset bubble to explode and then would try to put out the fire.</li></li></ul><li>The insurance scheme?<br /><ul><li>The insurance scheme does not fit to the mandate given to the IMF to « strengthen its capacity to help its members cope with financial volatility, reducing the economic disruption from sudden swings in capital flows and the perceived need for an excessive reserve accumulation ».
An insurance scheme will not prevent sudden swings.
The funding of the insurance scheme creates the same drawback as excessive reserve accumulation. The money stays idle while it could be usefully invested.
An insurance scheme strengthens moral hazard.</li></li></ul><li>A fee on large bank balance sheet?<br /><ul><li>President Obama’s « Financial Crisis Responsibility Fee » is a better proposal in so far it is tax-based, not insurance-based and the receipts would go to the general government budget.
The tax revenue would be capped to $90bn over 10 years.
All non-registered financial institutions, including hedge funds, would not be covered.
The efficiency of such risk-based tax would be conditioned upon supervisory authorities’ ability to control effectively the risk exposure of banks. </li></li></ul><li>A tax on large bank balance sheet?<br />Because complex derivatives and structured products have been left unscathed, risk will be difficult to assess and banks will still have a lot of opportunities for regulatory and tax arbitrage.<br />This fee will be difficult to implement and costly.<br />
The best alternative is the Financial Transaction Tax.<br /><ul><li>The FTT is the only proposal able to achieve several objectives at the same time.</li></ul>It is the only one able to generate huge receipts, between $286bn (0.01% tax) and $917bn (0.1% tax) (S. Schulmeister, 2009) to be compared with the $645bn to $710bn expected fiscal gap. <br />It would be a « fair and substantial contribution » that the financial sector could make to pay the burden it has imposed on society.<br />Government would recoup the cost of the bail out of banks.<br />It would avoid unnecessary social sacrifices.<br />
The best alternative is the Financial Transaction Tax<br />It would not leave aside the MDG and the climate change mitigation.<br />It would curb speculation and hence prevent another crisis.<br />It would tax all financial transactions, including the most controversial derivatives.<br />It would counterbalance financial authorities’ loss of control over global finance. The FTT provides government with a regulatory tool that would not be conditioned upon supervisory authorities’ ability to price risk.<br />
The best alternative is the Financial Transaction Tax<br />It would bring global banking back to its original function of financing the real economy.<br />It is a low cost solution. Collecting the tax is very easy on stock exchanges and not too complicated for OTC transactions. Tax can be collected at the dealing site, thanks to message routing or at the settlement site according to the specificities of each country.<br />