Transactions can be taxing
Financial-i's managing editor, Anita Hawser rants about a direct tax on financial transactions. Regulators may be rubbing their hands together at the prospect that it is payback time for the banks they had to bail out. But can a financial transaction tax really prevent another financial crisis?
There are a number of conflicting statements being made by regulatory authorities and government finance ministers as they seek to redress the cost to taxpayers of having to bail the banks out of trouble. On the one hand, banks, particularly in the UK and Europe are being lambasted for not lending enough to small businesses (Are banks still in the business of lending?). Then on the other hand, regulators are rubbing their hands together dreaming up new and varied ways they can tax the banks as payback for having to bail them out in the first place.
A levy or tax on banks, whatever you want to call it, is taking various forms. Some governments like the UK are imposing a levy on banks' balance sheets, but the even more concerning spectre are those that support imposing a global financial transaction levy or tax. This is an idea that is being bandied about by the G20, various EU member states (namely Belgium and France have adopted legislation on a currency transaction tax) and segments of the European Commission.
The EU budget commissioner, Janusz Lewandoski stated that a transaction tax could net a "big amount of money", which is incentive enough for those EU member states that want to reduce their contributions to the EU budget. It may be payback time as far as governments and the regulators are concerned, but a tax on transactions is misguided in many ways.
Will a tax or levy in an of itself prevent another financial crisis from occurring again? It is very doubtful, but that seems to be one of the rationales behind it. How will this levy be collected or what transactions will come under its remit? Not an easy one as financial transactions underpin global business and economic flows. Should those transactions be made the scapegoat for the financial crisis? The thinking appears to be that the rise in global transaction volumes can be largely explained by the "fast-growing derivatives market". But are all transactions; be they someone paying salaries cross-border or payment for goods received in danger of being lumped in with those, 'bad, bad' derivatives transactions?
More importantly, perhaps, while the transaction tax will impact banks, if it is not imposed globally, which seems unlikely given that some locations are likely to be more concerned with maintaining their global financial centre status than taxing the banks, then financial institutions will be able to slip through the net by moving to a location that does not tax transactions or by charging more for transactions, which means that the customer not the bank ultimately pays. Or as some suggest, could banks even minimise the number of transactions they conduct in order to avoid paying higher levels of tax. This seems ludicrous given that processing transactions is a core business for most global banks and was the one that delivered stable revenues when other parts of the banks' business were more volatile?
What does a transaction tax mean for SEPA, the Single Euro Payments Area, which promised customers that cross-border transactions in euro would be priced the same as domestic transactions. With a financial transaction tax added to that, is the promise of cheaper cross-border transactions within the EU still achievable?
Date Posted:13th August 2010