ifo President Fuest: The financial Transaction Tax Is a Step in the Wrong Direction
ifo President Clemens Fuest has criticized the planned financial transaction tax. “This tax is a perfect example of a policy that claims to solve problems, but actually exacerbates them,” he said in Munich. “Many people believe that it enables the state to fight harmful speculation, penalizing those who lined their pockets before the financial crisis at the expense of the general public. In fact, these goals call for other instruments.”
The low equity base of many banks was the main cause of harmful speculation and excessive risk appetite on the financial markets. In the wake of the financial crisis, banks ultimately had to be bailed out with state funding. “Taxing financial transactions does not prevent this scenario. Requiring banks to significantly increase their equity capital would be more effective. In addition, many countries have introduced levies on debt financing by banks,” Fuest said.
The new tax does not include important instruments of speculation, such as derivatives. Moreover, it reduces market turnover, making it easier for individual speculators to influence prices. “Consequently, a financial transaction tax may even promote unwanted price fluctuations as a result of speculative trading.”
Furthermore, the argument that certain financial services are not covered by VAT does not justify the introduction of a transaction tax. “The answer to this problem has been undisputed for years: a tax should be imposed on parts of the value creation in the financial sector, with the easiest method being the payrolls and bonuses of financial services providers. Denmark is one of the countries where this tax is enforced,” Fuest said.
The allegation that the International Monetary Fund (IMF) endorses a financial transaction tax is misleading. As long ago as 2010, the IMF released a report explaining that a financial transaction tax was not the best tool in compelling the financial sector to contribute to the costs of the financial crisis. “The IMF advised against taxing financial transactions. One of its suggestions was to impose a tax on the profits and remuneration of financial companies, known as the financial activity tax.”
