Is a Financial Transaction Tax in New Zealand a silver bullet?

Is a Financial Transaction Tax in New Zealand a silver bullet?

Geoff SimmonsTax and Welfare7 Comments

Every time we discuss new taxes, people raise the possible alternative of a Financial Transaction Tax in New Zealand. Known by some as a Robin Hood Tax, or a Tobin Tax, the FTT would put a small charge on every financial transaction made. It is gaining in popularity around the world and while it could theoretically work if all countries adopted it, so far the results from individual experiments have been far from impressive.

But before we look at the results, we should start by asking why some people want to tax transactions at all.

Why do we want a financial transaction Tax in New Zealand?

Placing a tax on a specific action can raise money, but it also discourages that behaviour. Sometimes that is a bad thing, and sometimes it is a good thing. Taxes on income for example raise a lot of money but also dent the incentive to go out there and earn income, which reduces output and creates a loss to society. The government is betting that voters will be happy to have more government services than income in the pocket. Taxes on pollution on the other hand can raise money, but also reduce pollution at the same time – creating a win/win for society – providing the cost of the pollution-heavy goods don’t rise too much. If taxing financial transactions leads to fewer of them, will we be better or worse off?

Some are convinced we’d be better off. They feel that bankers and traders are getting more than their fair share of benefit out of the globalized economy, that speculation is ‘excessive’, this is contributing to the greater volatility and uncertainty in markets so we’re worse off. Given the billions that pass through the financial sector every day, the idea is that clipping the ticket on each transaction would raise a lot of money and reduce both speculation and volatility in financial markets.

However, not all transactions are bad. Like when you get paid for example, or make a payment on your mortgage. Or send money overseas to pay for your upcoming holiday. Would you mind someone clipping the ticket on all of those? Of course you can specify what kinds of transactions you want to target with a tax, such as house sales (via a stamp duty) or share trades or foreign currency deals. But ordinary people still engage in all of those, at the very least through Kiwisaver.

Sure, some transactions are purely speculative, but an FTT won’t just stop those. It is a sledgehammer and would not discriminate between ‘good’ and ‘bad’ financial transactions.

Impact of a FTT on transactions

One development that has made the FTT easier to implement is the automation of many financial payments, making it difficult to avoid, at least in the jurisdiction in which it’s applied. On the other hand, the increased complexity of international markets means that it is easier for financial institutions to re-route their transactions beyond that jurisdiction simply to avoid the tax. The FTT then would be most effective if applied worldwide.

In the absence of international consensus, a lot depends on the design of tax. Perhaps the most well-known and successful FTT is stamp duty, which in some countries (such as the UK) is levied on house sales. This is typically paid as a percentage of the total house price, which distinguishes it from a capital gains tax. Given the size of the transaction it is hard to get around paying the tax. Stamp duties are fairly well researched and provide a useful example of the impact of a FTT on a market.

Research has found that (unsurprisingly) people respond to FTTs such as stamp duty by reducing the number of taxed transactions made. In other words, house sales drop. This doesn’t alter the intent of transactions, simply the number. Stamp duty hasn’t prevented speculation on housing, nor reduced volatility in the market. Quite the contrary, having fewer transactions can increase the volatility in the market. Fewer transactions can also have their costs in terms of the efficiency of the economy. Stamp duty for example makes it more likely for an elderly person to hold on to a home that is too large for them, and therefore makes it more difficult for families to find the houses they need.

Gathering Revenue

Perhaps the biggest disappointment of the FTT has been in the revenue generation side. Brookings estimate that in the United States a FTT could generate around $0.4% of GDP. That isn’t a huge amount; the New Zealand equivalent would be about $1b. The only way to get more revenue would be to have a higher tax rate on each transaction, which is really impossible if tax dodging is to be avoided, without some global consensus on applying the tax.

The experience of Sweden’s FTT has been interesting. When it was introduced, revenue was far lower than predicted, because of changes in the number of financial transactions. In fact, the lower number of transactions reduced revenue from Sweden’s capital gains tax, so the government ended up with less revenue overall.

In short, the FTT appeals mainly to those who seek to get at “wicked bankers and evil speculators” but it’s pretty naive. A Financial Transactions Tax in New Zealand is unlikely to raise a lot of money unless there is a global agreement, otherwise it would leak like a sieve, penalize quite innocent and necessary trade, impede economic activity unnecessarily – all features of a bad tax. In the mean time taxes like the Comprehensive Capital Income Tax (CCIT) seem to have much more potential to raise serious revenue and benefit the economy by closing existing tax loopholes.

Is a Financial Transaction Tax in New Zealand a silver bullet? was last modified: August 15th, 2016 by Geoff Simmons
About the Author

Geoff Simmons

Facebook Twitter

Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.

7 Comments on “Is a Financial Transaction Tax in New Zealand a silver bullet?”

  1. What you don’t say about the Swedish FTT is that it was only applied to a very small section of the economy, namely securties and derivatives. If an FTT was applied to all transactions then it would have provided significantly more revenue.
    I would advocate getting rid of all existing taxation and replacing it with only an FTT. Enforce this by utilizing a crypto currency that includes it as part of the transaction logic. The benefits would be immense. Almost zero cost to collect, the widest possible tax base and a tax rate substantially less than any current tax regeime. As a side effect , we could could reorganise the terminally broken banking and financial systems that are causing the growing inequality we see occuring now in NZ.

  2. This seems like a new GST.

    The relationship to Kiwisaver would need to be explored. We want people to save for their retirement, but aren’t those financial transactions?

  3. The first issue that needs addressing is the statement that taxes are about revenue – they are not. Our government spends by crediting bank accounts, and taxes then cancel the money created by the spending. The government is never revenue constrained, and tax policy based on revenue collection is abysmally bad policy.Taxation is for creating a demand for the governments money, for controlling both the amount of money in the economy (ie inflation) , and behaviours. I would support a FTT applied broadly by taxing any amount leaving a bank account. This should replace income taxes, and probably GST. Such a tax would be easy to collect, would bite harder when economic activity was higher, and vice versa ie be an automatic stabiliser, and by not limiting it to specific transactions would be very broadly based.

    1. Our governments certainly appear to be perennially spending constrained. If they were not, why, for example, would we not immediately write off all student loans and abolish fees, introduce a UBI at the level of the living wage, and stop worrying about raising the age of entitlement to NZ super?

      1. All of those things are entirely possible with the political will.We operate in a monetary and financial system designed after WW2, over a gold standard. In1971 Nixon ended convertibility of us$ to gold, which removed the constraint on government money creation. As money now doesn’t have to be backed by gold the gov can freely create money as required, without needing to extract it from the economy as revenue to maintain the gold backing. The constraints are now “real” constraints, ie the ability of the “real” economy to absorb created money without causing inflation.Unfortunately the economic paradigms from Bretton Woods continue to dominate. Most people believe the Household fallacy, the belief that the government like a household must have an income to spend, and can be bankrupted by too much debt. These explanations are heterodox economics, from the school of Modern Monetary Theory. I suggest reading Warren Moslers “seven deadly innocent frauds of economics” (google it – pdf download” ) for a deeper introduction.

  4. Doesn’t an FTT have commonalities with the comprehensive capital income tax (CCIT). With that tax you argue (much to the consternation of many resident home owners … but not me, I’ll add) that a comprehensive tax is necessary exactly because it then can’t be avoided. Here you seem to be arguing the opposite when you talk about good transactions and bad transactions.

    You cite the Swedish FTT but that was not a universal tax on all transactions, was it? Wikipedia tells me it was limited to equity securities.

    To my mind, an FTT is so easy to introduce with electronic banking that there isn’t much to be lost by just having a go. Think about how complex the collection of GST is in practice and the compliance cost on all businesses. Even if revenue is small, surely $1 billion collected so easily would surely make sense. It would also be easy to tune the rate to find an optimum value.

    There are other better ways to get at “wicked bankers and evil speculators”, if that’s what people want.

    To be frank, is there really a convincing argument argument against a low-rate universal FTT?

Leave a Reply

Your email address will not be published. Required fields are marked *