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NERI Seminar Dublin: How much would a Financial Transactions Tax raise?

In 2011 the European Commission outlined proposals for a Europe wide financial transactions tax (FTT). Since then the proposal has been pursued by ten countries under ‘enhanced cooperation’ procedures with plans evolving to introduce the tax during 2016/2017. To date Ireland has not signed up to adopting a FTT.

This paper estimates the revenue that Ireland would collect from participating in the European FTT. Drawing on data from official sources, it first establishes the size of the FTT tax base for Ireland. Subsequently, the paper estimates a baseline tax revenue and considers the robustness of this estimate using a suite of sensitivity tests.

The paper finds that were Ireland to adopt a FTT, the net revenue yield would be between €320m and €360m per annum.

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NERI Seminar Dublin: How much would a Financial Transactions Tax raise?

  1. 1. Dr Micheál Collins NERI (Nevin Economic Research Institute) Dublin mcollins@NERInstitute.net @ MLGCollins www.NERInstitute.net How much would a FTT raise? NERI Seminar 10th February 2016
  2. 2. Outline 1. Introduction 2. The EC FTT proposal 3. Modelling 4. Establishing a Tax Base 5. Net Revenue Yield 6. Sensitivity & Scenarios 7. Some Implications 8. Conclusion
  3. 3. 1. Introduction • Proposals for a small tax on financial transactions since the Wall Street Crash o Keynes (1936), Tobin (1972),… • Revived given origins of recent crash • EC proposal in 2011 o No agreement…enhanced co-operation (11, 10 countries) o 66% to fund EC budget o Revised: now considered national revenue • Change = important for Ireland • Aim here: (i) tax base & (ii) net revenue yield
  4. 4. 2. EC FTT proposal • Securities o Shares and Bonds o A tax of 0.1% (one-tenth of one per cent) • Derivatives o Exchange Traded Derivatives o OTC currency linked Derivatives o OTC interest, equity and commodity-linked Derivatives o Credit Default Swaps o A tax of 0.01% (one hundredth of one per cent)
  5. 5. • Clever structure: triple A structure; hard to avoid… • Yet some exemptions: o In design and evolution…ongoing… o Transactions of households, SMEs etc o Gov. bonds and derivatives linked to sovereign debt o Central Bank operations with EU entities • Ireland o Hesitant o Not outright against; but cautious and sitting back • EC plans o December 2014; Portugal and Austria roles o Aim to complete in 2016; introduce in 2017/2018
  6. 6. 3. Modelling • A literature…. o Ireland: one CB/ESRI study in 2012 o EC Impact Study, Copenhagen Economics, DIW… • Equation: 𝑅 = 𝜏 . 𝑉. 𝐸. 1 + 𝜏 𝑐 𝜀 where τ is the tax rate, V is the annual value of transactions being taxed, E is the rate of evasion/displacement or avoidance, c is the transaction costs and ε is the elasticity of the volume of transactions in the market (post any evasion) to the increase in taxation.
  7. 7. 4. Establishing a Tax Base • A big challenge • A lot of literature guidance to build from… • 4 steps 1. Obtain data on each instruments turnover 2. Adjustment(s) of turnover figure if appropriate 3. Allocation of corrected turnover to domestic and foreign (FTT, non-FTT) sources 4. Establish turnover relevant to calculation of Irish FTT tax revenue
  8. 8. Data • Shares o Central Bank Security Issue Statistics o Average year to July 2015 o Turnover from World Bank WDI • Bonds o Central Bank + ECB • ETDs o No data o CB/ESRI had value for 2010 o Combined with FIA Europe growth rates for 2011-2014 • OCDs (+CDS) o BIS Triennial Survey 2013
  9. 9. 5. Net Revenue Yield • To avoid double taxation o Need to abolish stamp duty on shares o Revenue Commissioners data to 2014 • +5% per annum to 2016 • €311.24m • Revenue forgone • Baseline Revenue o Model and parameters o Tax base
  10. 10. 6. Sensitivity & Scenarios • A comprehensive sensitivity analysis included • Why: o Assumptions and uncertainties in tax base compilation o Evolving proposal • Look at: o Variations in the tax rate o Variations in the tax base o Variations in the model parameters o Other scenarios
  11. 11. • If lower rate of ST securities = - €84m net revenue • If lower equities base /turnover = - €90m / -€128m • No evasion / medium evasion = +€195m / +€137m • If include revenue to Ireland (+5%) = +€32m • Remove most HFT = - €50m or - €70m • Repeat CB/ESRI modelling = +€27m • Assume ISE +33% = +€20m
  12. 12. Plausible Scenarios x2 • the baseline parameters are used; • HFT is almost eliminated and the evasion rate falls to 5% for securities and 25% for derivatives; [2 definitions] • there is an increase in turnover for the ISE – a 33% increase on turnover following the reduction of HFT; and • there is a flow of FTT revenues into Ireland equivalent to 5% of gross FTT revenue.
  13. 13. So overall, a range: from €320m to €350m…
  14. 14. 7. Some Implications • Looking at these under 4 headings 1. Scale and Incidence 2. Real Economy Effects 3. Stability and Knowledge of the Financial Markets 4. Allocation of Funds Raised
  15. 15. 1. Scale and Incidence o A very small tax o 0.07% effective rate o Difficult to pass on • €10m of OTC derivatives = €1,000 FTT • Fraction of costs and charges o Incidence likely to fall principally on financial institutions
  16. 16. 2. Real Economy Effects o To be actual, but small o It will • Marginally increase the cost of capital • Limited relocation effects, could be +/- • Small direct employment effects; losses for HFT • Marginally increase operating costs of financial firms and reduce their profits
  17. 17. 3. Stability and Knowledge of Financial Markets o Complement current EU reforms aimed at creating a safer financial system o Improve regulatory and societal knowledge o Reduce short-term market volatility
  18. 18. 4. Allocation of Funds Raised o Easy to collect (at source) o Flows into central pool of taxes o Merit in earmarking it • Common theme in history of FTTs • And for those proposing it o Irish campaign 2015: • 50% address poverty in Ireland; 25% ODA; 25% climate o If domestic spend…the some economic benefits
  19. 19. 8. Conclusion • As EC FTT proposal moves towards completion – choice for Ireland o Join or refrain? • Ideally, an evidence basis for this • Paper a contribution to this process • FTT = revenue of €320m - €350m per annum o Small but recurring o Not a panacea, but… • Some implications; but hard to argue benefits< costs
  20. 20. Dr Micheál Collins NERI (Nevin Economic Research Institute) Dublin mcollins@NERInstitute.net @ MLGCollins www.NERInstitute.net How much would a FTT raise? NERI Seminar 10th February 2016