IMF issues toolkit on how to implement Robin Hood Taxes
The IMF has issued a working paper which explores the practicalities of implementing Financial Transaction Taxes. What’s new? For the first time, as Oxfam’s Richard Gower points out, this is about how to implement FTTs – the implication is that the battle about whether to introduce them is over. Secondly, the paper indicates that FTTs can be easier and cheaper to implement than other taxes: indeed, there’s something inherent in financial transactions that makes them amenable to taxation, contrary to previous assumptions. Thirdly, the paper sets out that for every problem with implementation, there is a solution – good design is the critical issue. And finally, the paper sets out how FTTs can be implemented unilaterally, even if multilateral measures would be better. As ever, there’s a health warning that it is not a statement of IMF policy, although the paper itself ignores that health warning when referring to previous IMF papers!
First, the negatives: IMF staff are clearly still not totally sold on FTTs, continuing to underestminate the downsides of alternatives, and presenting reports (largely their own, so, er, not IMF policy!) which express concerns and problems as if they demonstrated incontestable shortcomings. But that’s about it. The paper is very helpful in lots of other ways, for example exploding the myth that Sweden’s experience of FTTs in the 1980s was an unavoidable disaster – better design would have avoided the problem. And whilst it is clearly true that taxing over-the-counter transactions is more difficult than exchange-traded instruments, the paper sets out how these difficulties can be overcome.
The paper provides an excellent summary of the nature of financial transactions (there are some very useful tables defining the different transaction types). It looks at the feasibility of different administrative options and how to address evasion (under-reporting, moving to other forms of transaction, or country-hopping) for exchange-traded instruments, over-the-counter instruments and foreign exchange instruments in turn.
There are some general points which are worth highlighting:
- because the market in financial transactions is not about trading actual goods and services, the people engaged in such trades need a way to prove that the trade has taken place (something which doesn’t apply to selling second-hand TVs, or doing a bit of refurbishment on your kitchen, for instance) – that makes the trades inherently easier to tax;
- partly for that reason, and partly because of the complexity of such markets, there are lots of institutions which exist to mediate between buyer and seller, and they can be (and are, in the examples of countries with existing FTTs) used to levy such taxes;
- evading FTTs can be made more difficult, more costly, and in some cases actually impossible, by developing incentives to comply or disincentives to evade (including, for example, making non-taxed trades legally unenforceable – see my first bullet). This does mean that relatively low rates of taxation can be better than higher rates, because the lower the rate, the less incentive there is to evade it – but then we’re not asking for high rates anyway;
- the more regulated the market, the easier it is to tax it (this is an important issue for addressing over-the-counter trading, which has become easier to tax precisely because – often in the wake of financial crises – these markets have become more heavily regulated);
- it is relatively simple to prevent or avoid attempts to shift countries (this is worth repeating because it is the commonest concern expressed by governments we are lobbying).
But the key points that stand out from the report are, I think, these:
- FTTs are simple and easy to implement;
- although exemptions are feasible, the more widespread the measure the better;
- multilateral agreement on implementation is better, but unilateral implementation is possible, and the downsides can be overcome;
- good design is crucial
Let’s leave the last words, though, to the author of the paper himself, John D Brondolo:
In principle, an FTT is no more difficult and, in some respects easier, to administer than other taxes.