Listener: 17 Match, 2012.
Keywords: Macroeconomics & Money; Regulation & Taxation;
Eminent economist James Tobin in 1972 suggested a financial transaction tax on spot-market currency conversions. Many others have supported him. That includes people who don’t like money and think of a financial transaction tax as a sin tax. (Tobin certainly did not. He was awarded a Nobel Prize for contributions to monetary theory; he knew money was necessary for the specialisation that gives a high standard of living.)
Others saw it as an easy way to raise tax revenue; it is not. They thought it would raise huge quantities of revenue; it won’t. A number of our minor parties support some sort of financial transaction tax, but they overestimate the revenue it will raise and underestimate the complexity of its application.
Tobin’s concern was that there was an imbalance in the speed of transactions between the real (production and expenditure) economy and the financial sector. Many of the economic management changes of the past few decades have been aimed at speeding up the real economy, but people are not going to change their jobs every minute or two – and that would be very slow in some financial markets.
My thinking is influenced by the extraordinary fact that trading in the New Zealand dollar is far out of line with the size of our economy; by some measures it is the most extreme of global currencies. The financial sector will argue that it contributes to the economy in terms of jobs and profits. So does the Cosa Nostra. Does that mean it makes a positive contribution?
Recent events suggest that although the financial system carries out many useful functions, some of its activities amount to gambling with other people’s money – profiting from charging the client, not from taking the risk. When it all turned to custard, the financiers were hardly exposed; when they were, they expected the taxpayer to bail them out.
It’s not unlike what is happening in cricket. A 20/20 match may be a spectacle, but it is driven by betting, for which this form of the game offers a wealth of opportunities. Many gamblers are offshore, but the consequences are onshore. I am not against 20/20 cricket, although many commentators think the shorter game damages serious cricket and regret that distortion.
Likewise gambling on the New Zealand dollar probably undermines New Zealand business outside the financial system. A low turnover tax will discourage some gambling excesses, making the financial system more efficient and effective. About 1000 economists – some as eminent as Tobin was, some as lowly as me – have signed a petition supporting a financial transaction tax.
Recently the European Union proposed adopting one. The great financial centres of London and New York are strongly resisting the idea, and their East Asian equivalents are not showing much enthusiasm either. In January, French President Nicolas Sarkozy announced that France would impose a tax on high-frequency trading, at a rate of 0.1%. He expects it to raise ?1 billion a year (a New Zealand equivalent would bring in about $170 million).
The new tax will cut the French deficit and Sarkozy hopes other members of the European Monetary Union will follow. A financial transaction tax works best if applied by a large block of countries; it would be foolish for a tiddler like New Zealand to go it alone. Instead we should be a “fast follower”, so when the EU introduces one we should do so soon after, as far as possible aligning our tax coverage with Europe’s. And we should encourage other countries to join us.
Hopefully, in the depths of the bureaucracy, a small team is pondering such a tax for New Zealand. They have probably already concluded it won’t generate a lot of revenue – perhaps $100 million after the clumsy stamp duties are abolished – although any extra revenue would be welcome. More importantly, it would reduce some of the dangers that high-spinning financial transactions expose the economy to. And it would do so without wrecking the constructive contribution to prosperity that specialisation provides.