Dr Micheál CollinsNERI (Nevin Economic Research Institute)Dublinmcollins@NERInstitute.net @ MLGCollinswww.NERInstitute.net

How much would aFTT raise?

NERI Seminar10th February 2016

Outline1. Introduction2. The EC FTT proposal3. Modelling4. Establishing a Tax Base5. Net Revenue Yield6. Sensitivity & Scenarios7. Some Implications8. Conclusion

1. Introduction• Proposals for a small tax on financial transactions

since the Wall Street Crasho 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 budgeto Revised: now considered national revenue

• Change = important for Ireland• Aim here: (i) tax base & (ii) net revenue yield

2. EC FTT proposal• Securities

o Shares and Bondso A tax of 0.1% (one-tenth of one per cent)

• Derivativeso Exchange Traded Derivativeso OTC currency linked Derivativeso OTC interest, equity and commodity-linked Derivativeso Credit Default Swapso A tax of 0.01% (one hundredth of one per cent)

• Clever structure: triple A structure; hard to avoid…• Yet some exemptions:

o In design and evolution…ongoing…o Transactions of households, SMEs etco Gov. bonds and derivatives linked to sovereign debto Central Bank operations with EU entities

• Irelando Hesitanto Not outright against; but cautious and sitting back

• EC planso December 2014; Portugal and Austria roleso Aim to complete in 2016; introduce in 2017/2018

3. Modelling• A literature….

o Ireland: one CB/ESRI study in 2012o EC Impact Study, Copenhagen Economics, DIW…

• Equation:

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.

4. Establishing a Tax Base• A big challenge• A lot of literature guidance to build from…• 4 steps

1. Obtain data on each instruments turnover2. Adjustment(s) of turnover figure if appropriate3. Allocation of corrected turnover to domestic and

foreign (FTT, non-FTT) sources4. Establish turnover relevant to calculation of Irish FTT

tax revenue

Data• Shares

o Central Bank Security Issue Statisticso Average year to July 2015o Turnover from World Bank WDI

• Bondso Central Bank + ECB

• ETDso No datao CB/ESRI had value for 2010o Combined with FIA Europe growth rates for 2011-2014

• OCDs (+CDS)o BIS Triennial Survey 2013

5. Net Revenue Yield• To avoid double taxation

o Need to abolish stamp duty on shareso Revenue Commissioners data to 2014

• +5% per annum to 2016• €311.24m• Revenue forgone

• Baseline Revenueo Model and parameters o Tax base

6. Sensitivity & Scenarios• A comprehensive sensitivity analysis included• Why:

o Assumptions and uncertainties in tax base compilationo Evolving proposal

• Look at:o Variations in the tax rateo Variations in the tax baseo Variations in the model parameterso Other scenarios

• 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

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.

So overall, a range:from €320m to €350m…

7. Some Implications• Looking at these under 4 headings

1. Scale and Incidence2. Real Economy Effects3. Stability and Knowledge of the Financial Markets4. Allocation of Funds Raised

1. Scale and Incidenceo A very small taxo 0.07% effective rateo 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

2. Real Economy Effectso To be actual, but smallo 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

3. Stability and Knowledge of Financial Marketso Complement current EU reforms aimed at creating a safer

financial systemo Improve regulatory and societal knowledgeo Reduce short-term market volatility

4. Allocation of Funds Raisedo Easy to collect (at source)o Flows into central pool of taxeso 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

8. Conclusion• As EC FTT proposal moves towards completion –

choice for Irelando 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 recurringo Not a panacea, but…

• Some implications; but hard to argue benefits< costs

Dr Micheál CollinsNERI (Nevin Economic Research Institute)Dublinmcollins@NERInstitute.net @ MLGCollinswww.NERInstitute.net

How much would aFTT raise?

NERI Seminar10th February 2016