Study backs financial transaction tax

Ireland’s case for refusing to support a financial transactions tax unless it was global has been undermined by a study from two eminent economists presented to the European Parliament.

It argued that many of the world’s largest and fastest growing countries already have similar taxes in place and it has not caused them to lose business. They also say the money raised would help grow the economy.

The Government argues that unless the tax, proposed by the European Commission and supported by Germany and France, is global, it would result in Ireland losing business to the City of London financial centre.

The study, commissioned by the Socialist group in the parliament, points out that Hong Kong, Seoul, Mumbai, Johannesburg and Taipei, among the most rapidly growing financial centres in the world, have had a financial transaction tax for some time and raise more than €17.5 billion a year from it.

Brazil has also instituted new taxes and “despite these taxes, is struggling to calm investor enthusiasm,” said the report. South Korea and Britain have stamp duty on equities only — not derivatives as proposed in the EU’s draft — but still raise around €4bn each a year.

“The empirical evidence suggests that a 0.1% tax would therefore have a minimal impact on demand and would therefore, despite its low level, yield significant sums,” the report said.

The study, carried out by Stephany Griffith-Jones, financial markets director at the initiative for policy dialogue at Columbia University, and Avinash Persaud, founder of Intelligence Capital, critiqued the proposals from the commission on the financial transaction tax.

They argue taxing financial transactions would benefit countries much more than suggested by the figures from the commission that showed a drop of 0.2% of GDP. If all the impacts, including the reduction of systemic risk and so the probability of further crisis, and the expansion of total aggregate demand for consumption and the boost of the real economy through fiscal consolidation were taken into effect, it would add 0.25% to the GDP at a minimum, they say.

“The financial transaction tax would contribute to fiscal consolidation, a highly desirable aim, especially for those European countries with large public debts and fiscal deficits… lower the cost of their new borrowing which would positively impact on their growth and in some cases could contribute to diminish the severity of their sovereign debt crisis.”

They also point out that long-term investors like pension funds and insurance companies would pay least and short-term speculators like hedge funds or high frequency traders would pay most. Pension funds hold stock for two years on average which would cost them 0.1% while a high frequency trader, holding stock for seconds, will turn over its portfolio in a day, costing them 50% a year in the tax.