Mind the global public good resource gap!
The Trade Union Advisory Committee to the Organisation on Economic Co-operation and Development (TUAC to their friends) have analysed three recent studies into transaction taxes published in Austria, France and the US. They’re interested in the potential of a Financial Transaction Tax in tackling what they’ve identified as a global public good resource gap – the difference between deficits as a result of the financial crisis and bailouts and international spending pledges to meet targets on poverty and climate change.
Here are some quotes from their resulting paper, “The Parameters of a Financial Transaction Tax and the OECD Global Public Good Resource Gap, 2010-2020“:
For the OECD, the size of fiscal consolidation projected at $300-370bn per year over the coming years will place severe budget constraints on governments. Working families risk paying twice for the crisis: first through rising unemployment and falling incomes and then, as a result of cuts in public expenditure, through reduced access to social services and the corresponding rise in inequality.
…And yet these same governments have still to deliver on their commitments to finance global public goods, including raising Official Development Assistance to 0.7% of Gross National Income and climate change adaptation and mitigation measures for developing countries. The global public good resource gap that would emerge would be in the range of $324-336bn per year between 2012 and 2017.
TUAC believe a Financial Transaction Tax could be an economically viable and politically acceptable way of plugging this gap, and preventing its re-occurrence:
The economic justification for an FTT starts with the acknowledgement of the harmful effects of short-term speculation producing strong and persistent deviations of asset prices from their theoretical equilibrium levels.
Such “overshooting” in prices lead to speculative bubbles over the long run. A measured and controlled increase in transaction costs implied by an FTT would slow down trading activities so as to align capital flows with economic fundamentals and the real economy , while freeing up new sources of financing for global public goods.
And they have this to say on the IMF’s current preferred option of a global banking insurance scheme, and how it measures up as an alternative to a transaction tax:
The two instruments differ in terms of both revenues (which would not be available for public goods under an insurance scheme) and the handling of risk (institution-based under insurance, transaction-based under an FTT).
Two and a half years into the crisis, serious flaws remain in the national and international financial supervisory framework. An FTT, unlike the insurance proposal, would provide governments with a powerful regulatory tool which would not depend on the ability of the supervisory authorities to price or assess risk. An FTT is thus the most appropriate ‘low-cost’ instrument for tackling volatility in asset prices and for downsizing the global banking industry, particularly at a time when the international financial supervisory framework is in tatters and will take a decade to reform.