The International Federation of Stock Exchanges (WFE) has published a very harsh report against the Financial Transaction Tax (ITF) that some States apply to stock market operations. The news challenges Spain, because we are one of the few countries in Europe – along with France, Greece, Italy and Belgium – in which this rare tax exists, better known as the ‘Tobin tax’ in honor of its inventor.
As applied in our country, it taxes purchases of shares in companies with a market capitalization of more than 1,000 million euros at 0.2% – more than what the European Union proposed when it tried to implement the rule ( 52 companies in Spain according to the Tax Agency), as long as these operations are not intraday.
It is not a tax that affects many directly, but indirectly creates “serious and counterproductive” distortions – reads the WFE report – that increase volatility, scare away investments and have their effect on the real economy.
To contextualize the problem, it is necessary to explain where this tax comes from, which began as something very different from what it is now. Named after the American economist James Tobin (1918-2002), a Keynesian who won the Nobel Prize in Economics in 1981 for his studies on monetary policy. He first proposed the concept of FTTs in an article in the journal ‘Janeway Lectures’ in 1971, in principle as a mechanism to curb the volatility of international exchange markets.
The moment was propitious. That same year, US President Richard Nixon, who was dealing with a pressing trade deficit and debt triggered by the conflict in Vietnam, would blow up the gold standard to finance debt through the issuance of unbacked money. A new monetary system was born, now based on flexible exchange, and with it the problem of volatility arose. The stock markets experienced a massive short-term currency fluctuation that made currency exchange prices between countries unpredictable and affected their currencies.
In this scenario, Tobin’s proposal emerged as a mechanism available to States to limit speculative movements, curb the volatility of exchange markets and limit the excessive power of financial markets.
However, starting in the 1990s the concept was expanded to tax financial transactions as a whole, and The anti-globalization and anti-capitalist movements championed Tobin’s idea as a remedy against speculators; to the chagrin of its inventor, by the way, who died regretting that he had been misunderstood so many times.
The justifications vary depending on the country that applies it, but generally the reasons given for imposing the tax are the control of volatility and the redistribution of wealth.
A tax that collects little in Spain
When the second Government of Pedro Sánchez approved the application of the rate in our country – two years earlier the CNMV had warned of the failure in other States and that it would hinder the competitiveness of our market – it justified it more for the second than for the first. It was about “reinforcing the equity of the tax system,” said the Minister of Finance, María Jesús Montero, at the time.
In their note, the WFE researchers do not judge the effectiveness of the tax as a tax tool, although it must be remembered that The collection planned by the Treasury in 2021 was 850 million euros and they immediately had to review the forecasts after that year it only raised 295 million; In 2023 there were 197.
And it is worth comparing the income received with the damages caused by the existence of the tax, which according to the WFE report are many. «The logic that, by increasing transaction costs, an FTT curbs volatility and mispricing of assets is a serious mistake. In fact, it has the opposite effect by discouraging informed traders, meaning there are fewer buyers and sellers to negotiate at the ideal price,” explains Nandini Sukumar, CEO of the WFE.
Scares away investors
After analyzing the 250 market infrastructures that are federated in the WFE, Researchers have concluded that FTTs increase the costs associated with trading financial assetswhich can affect net returns for investors and discourage investments in both the short and long term. In turn, they reduce trading volume and market liquidity, leading to wider spreads between bid and ask prices, slower price formation and increased market volatility, “which negatively impacts overall market efficiency,” the report reads.
They also distort the behavior of investors, forcing them to modify their strategies to avoid assets that are taxed, “which can lead to suboptimal investment decisions and a shift towards riskier or less regulated markets,” explains the WFE.
The list goes on: FTTs indirectly increase the cost of capital for companies, making it more expensive to finance new projects, slow down innovation and economic growth and cause investors to move their capital to jurisdictions with non-existent taxes.
For Richard Metcalfe, head of regulatory research at the International Federation of Exchanges, History has shown that “it is dangerous to experiment with ITFs«, and gives the example of Sweden, where it was eradicated in 1991 due to poor results.
Nandini Sukumar, for her part, considers that Regulators should learn from the experience of the United States, where deregulation, he explains, “has led to lower price volatility.” “The effect of regulation can extend from the financial market to the broader economy, so this (regulation) must be addressed for the benefit of investors and companies. The elimination of ITTs will lead to growth and lower volatility,” concludes the CEO of the WFE.
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