Stephan Schulmeister est un économiste autrichien et un conseiller du gouvernement.
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The financial industry worries that the FTT would duplicate its tax burden in countries which have already implemented a bank levy. Do you think the sector should have both a levy and an FTT?
An FTT would be preferable to a bank levy, which burdens banks irrespective of the business they are engaged in. Detrimental activities would remain unaffected by a bank levy, which taxes the holding of assets and liabilities, not their frequent turnover.
For example, before the mortgage crisis broke out, Deutsche Bank together with Goldman Sachs, Morgan Stanley – so-called 'finance alchemy banks' (FABs) – created a new derivative, the ABX index contract, and used this instrument to speculate for a decline in the value of mortgage-backed securities. At the same time, FABs earned many millions in fees from securitising and selling these securities.
But that was the last crisis. Policymakers still need proof that the FTT is relevant right now. What about speculation against sovereign debt?
The FTT is relevant right now because it could curb speculation on sovereign debt. Through trading credit default swaps (CDSs), FABs and hedge funds engage increasingly in speculating against certain debtor governments. By doing so, risk premiums are driven up, which in turn raises the value of the CDSs. Also high-frequency flash trading has almost exploded over recent years. These strategies are based on algorithms which completely neglect market fundamentals and, hence, necessarily destabilise asset prices.
All the activities mentioned above cannot be tackled by a bank levy because it is based on balance sheet positions, on stocks and not on flows.
In addition, the authors of the IMF and European Commission papers do not seem to have considered the following fact: those smart banks, the FABs, which most successfully speculate in asset markets do not hold risky assets for an extended period of time. FABs main profits stem from short-term trading and from selling risky assets to less smart banks, like the German Landesbanken.
Sceptics argue that an FTT will ultimately burden the consumer, not the trader, and that studies on tax incidence prove that businesses will without fail subsidise new charges creatively to ensure a minimal loss of revenue. Do you agree?
No, because short-term trading with high leverage is predominantly done by hedge funds which engage in high frequency trading, some 'finance alchemy banks', and by the increasing number of amateur traders. To whom should Goldman transfer the tax burden?
As regards tax incidence, the IMF argues that the real burden of an FTT "might fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector". These statements seem to hold much better for the two measures proposed by the IMF and the [European] Commission, namely, the bank levy and the FAT, than for the FTT.
The bank levy and the FAT do not tax specific activities but burden balance sheet positions. As a consequence, banks could easily shift the tax burden on their clients. By contrast, the FTT would burden certain activities at certain institutions. Banks which do not engage in proprietary trading would pay no FTT at all, though they would be burdened by a bank levy and/or an FAT.
Big corporations which engage in short-term speculation would have to pay the FTT but they would escape an FAT. Hedge funds which use trading systems based on high frequency data would be subject to the FTT, but they would also escape a bank levy and probably also an FAT. Hedge funds would probably shift the tax burden on their clients. Amateur speculators, of which there are millions in advanced economies, would pay the tax and their internet brokers would likely shift the tax burden on their clients.
Is there any proof that an FTT will dampen speculation, as expected?
No, there is no proof, but if one takes the empirical evidence on trading practices and asset price dynamics as a whole, it seems very plausible. There is excessive trading activity in modern asset markets due to the predominance of short-term speculation. The overall global volume of financial transactions is roughly 67 times higher than world GDP.
The ever "faster" trading activities destabilise exchange rates, commodity prices, interest rates and stock prices over the short term as well as over the long term. This is so because short-term price runs, strengthened by the use of automated trading systems, accumulate to long-term trends, bull markets and bear markets.
An FTT would specifically increase the costs of those speculative transactions which are unrelated to market fundamentals. This is so because the more short-term oriented a trading activity is and the higher its leverage, like derivatives, the more the FTT will raise transaction costs making high frequency trading less profitable.
An FTT would also levy substantial contributions on those actors whose activities had significantly contributed to the development of the financial crisis in 2008/2009 and of the euro crisis in 2010/2011. At the same time, those financial actors who still focus on servicing the real economy – 'boring banking' – would not be burdened unless they have to pay a general bank levy or an FAT.
The industry argues that the Commission is being irresponsible in times of recession if it does not try to measure the cumulative impact of all new financial regulation. Do you agree?
In part, at least I have tried to evaluate the possible effects. I am curious to read how the Commission argues in favour of an FTT when it makes its full proposal in the autumn because I had a lot of controversial debates there myself. But by the way, did anyone ever try to measure the cumulative impact of all financial deregulation in the past?
The EU and its many consultancies are spending a huge amount of money on the FTT campaign. Voters are responding enthusiastically to an idea that is associated with Robin Hood. But is all of this just political hype when the governments of the main financial centres have already cast an FTT aside?
An FTT could be introduced at the EU level without doing much harm to the European markets, according to a study I have done. So the key issue is just getting the UK on our side. Their position might change in the next recession, which is coming sooner than most people think. It will hit the economy and the fiscal stance in the UK particularly hard. More to the point, the British government would by far have the highest revenues from an FTT.