IMF on FTTs: trapped in free market ideology
The latest IMF working paper (which means it’s not a statement of IMF policy) on Financial Transaction Taxes doesn’t add a lot to our understanding of their likely impact. It accepts that they would raise huge sums of money (and reiterates the widespread use of such taxes), but restates the IMF’s support for a Financial Activities Tax that would raise far less. The rationale is that FTTs would reduce the ‘effectiveness’ of the financial markets. Those who still believe that the financial markets are efficient at all must now be a small sect of reality deniers or people who have just woken from a twenty year coma: the paper admits that FTTs would not only raise huge sums (which could be used to combat global poverty and address the climate change challenge, as well as reducing damaging cuts in public spending) but also reduce risk-taking and discourage short-termism. It’s just that the IMF appears still to believe that taking risks with the financial markets and short-termism are good things. That’s why their assertion that FTTs would “distort” tax-free markets is at the nub of their preference for the FAT taxes which would have less impact on the markets, and raise less revenue.
For those of us who believe FTTs would “correct” free market behaviour, and that long-term investments would actually be a good idea, the IMF have not only confirmed that only FTTs offer the revenue-raising potential we need, but would also have beneficial behavioural impacts too.
The report often uses pejorative language (eg “distorts” instead of “corrects” above). It also asserts:
“Though FTTs appear to conform to the tax policy precept of levying a low rate on a broad base, they conflict with the precept that, because gross transaction taxes cascade and distort production, they should therefore be avoided when more efficient tax instruments are available.”
Note the use of “seems” where FTTs are asserted to be in line with precepts – no such qualifier where the opposite is asserted. In a paper which acknowledges the polemical nature of much of the FTT literature, such biased language is unacceptable.
In addition, the paper devotes far more space to criticising the impact of FTTs on market activity, despite this being the secondary objective of FTTs, than on the revenue generating impact which is its main objective. And when it turns to alternatives, there is no assessment at all of the sums that would be raised: but their technical superiority over FTTs is asserted without evidence or a critical approach. More evidence that bias is what drives the IMF on this issue, not the evidence-based policy-making they claim.
As an example of the short-term/long-term issue, the report contains one really interesting factoid:
“In 2009, the average holding period for stocks in the Standard and Poors 500 stock index was 0.4 years, or about 3.5 months. (This is down sharply from the average holding period of 1.8 years in 1990.)”
Hands up anyone who thinks that western capitalism has improved in the last two decades? Short-termism in investment could just be one of the major problems, and the more lucrative such short-term, second-hand share trading becomes (as opposed to initial investment in start-ups, for example), the less we can expect to see real growth that produces more equitable distribution of wealth.
Most of the criticisms of experience of FTTs covered in the paper are not actually reasons to abandon the idea – they simply indicate better and worse ways of implementing FTTs. The Swedish experience in the early 1990s – which seems to have had the effect of making Sweden permanently hostile to FTTs – is actually merely what happens when you introduce an FTT which people can easily avoid: certainly it suggests that the wider the applicability of the tax, the better. And the paper does devote some space to the issue of how FTTs could be implemented more effectively which again is nothing new, but helpful nonetheless.