In their new essay “It is necessary to tax financial speculation”, mathematician Ivar Ekeland, former President of Paris-Dauphine University and economist Jean-Charles Rochet, professor at the University of Geneva and at Massachusetts Institute of Technology (MIT) – recommend the introduction of a 0.3% tax on all electronic transactions, i.e. money transfers between bank accounts of individuals and businesses to finance with reason and justice a (large) part of the needs for post-pandemic economic reconstruction Covid-19, and “realign individual interests in the direction of the common good”.
Jean-Charles Rochet is well-known in the payments world and has published numerous papers on payments economics and interchange including a seminal paper on two-sided markets, co-written with Jean Tirole, who was awarded the 2014 Nobel prize in Economics. The paper Co-operation Among Competitors: Some Economics of Payment Card Associations has revolutionised how economists, regulator and anti-trust authorities analyse interchange fees and other aspects of the payments business. Tirole and Rochet are also the inventors of the tourist test, which has been used by the European Commission amongst others in considering regulation of interchange fees. The test indicates the Multilateral Interchange Fee (MIF) level for which merchants indifferently accept cash or cards; i.e. this fee level ensures that merchants do not pay higher charges than the value of the net transactional benefits which card use gives them compared to cash.
The idea of taxing financial transactions in times of crisis is far from new. The best-known historical example is the stamp duty on share transfers, introduced by Great Britain in 1694 to fund a war against France. Originally created for four years, this tax is still in place today.
Following the 2008 global financial crisis, France introduced a tax on the purchase of shares in 2012, but it generates very little revenue. Following the lobbying of the financial industry, high frequency transactions, which constitute the lion’s share of the exchanges, are exempt. In addition, banks offer their large customers complex arrangements to avoid this tax.
Daily transactions on the sole over-the-counter market for interest rate derivatives exceed $ 6,500 billion worldwide, every day! But the question is how to tax these transactions, without inventing a labyrinthine fiscal system and disrupting the financial system? The economist Edgar Feige had a brilliantly simple idea: to collect the tax at the point of arrival of all these operations, that is to say on the bank account.
Ekeland and Rochet propose, as did Feige, to introduce a micro tax of around 0.3% on all electronic payments, that is to say all transfers of money between bank accounts of individuals and businesses. It might be unfair to tax all payments indiscriminately, including those which do not correspond to financial transactions, but to vital economic activities, and which involve modest households. Unfortunately, this is the only simple way, according to the authors, to put an end to all the tax avoidance and industry lobbying strategies that have made all of the financial transaction taxes experienced to date in very ineffective.
In addition, such a tax would be almost painless for average-income households. It would pay the tax twice, once when he receives it and once when he spends it. The total burden for the vast majority of households would therefore be around 0.6% of their income, which could even be neutralised by reducing the sales tax.
On the other hand, households with a large financial portfolio, which actively speculate on the financial markets, would be taxed substantially. Unlike VAT, the micro tax would therefore be progressive, since wealthy households “consume” more payments than others, and it would only discourage certain speculative activities whose social utility is unclear.
The tax is also very easy to collect (a line of code on bank account management software) and very difficult to avoid. It has been implemented with some success by several countries, and it has recently been the subject of a popular initiative referendum project in Switzerland, spurred on by economist Marc Chesney. It would rebalance the current tax system, which taxes labor, savings and consumption too heavily, and exempts financial speculation.
For Rochet and Ekeland, this tax would be able to realign individual interests towards the common good. It would have a minor impact on average income households and would hardly tax productive activities or consumption. It would be able to garner the assent of a large majority of citizens. “In these difficult times when the State needs new resources and must reinvent a sustainable economy, we hope that it will be the subject of public debate.” state the authors.