We may rue the day we refused a transaction tax
ANALYSIS:FOR DECADES folk have wondered how the worst excesses of globalised finance could be curbed. One of the most popular ideas has been to impose a small tax on every financial transaction so that well-thought-out cross-border capital movements could go ahead largely unhindered, but rapid flows of hot money that contribute to the problem of herding by financial market participants would be made less profitable.
But putting sand in the wheels of finance to slow it down and make it less likely to go out of control has always faced the most severe collective-action problem – if only one country opts out, that country could lure banks from tax-levying jurisdictions.
Finance is never shy about playing on this fear. Money men always remind governments it will be on their heads if jobs migrate. And just as politicians like nothing better than taking credit for new jobs when they are announced, there is little they fear more than being accused of destroying people’s livelihoods. All too easy for the financiers.
And it is easier still because they can plausibly claim the financial system might not be made any safer if one or a small number of jurisdictions opted out of imposing the tax – the volume of transactions could, in theory, be unaffected if the tax was not uniformly levied.
The near insurmountable difficulties of agreeing such a tax were in evidence yesterday when European Union states came nowhere near reaching unanimous agreement over the long-mooted financial transactions tax, known in EU jargon as the FTT.
Member states who believed their footloose financiers would take flight to non-FTT jurisdictions said no thanks to the German proposal. Michael Noonan was among the nein-sayers.
At the forefront of his thoughts was the International Financial Services Centre in Dublin’s docklands. If he had slapped the FTT on Ireland-based institutions, the jobs of thousands of well-paid people on the banks of the Liffey could have washed up on the banks of the Thames.
During last year’s general election campaign, Noonan claimed – with tongue only a little in cheek – that when Anglo Irish bank was mentioned on doorsteps, normally placid family hounds would start barking.
If the dogs in the street know about Anglo, an even bigger disaster is much less well known. Its name is Depfa. Depfa Bank was originally a German institution. But it relocated to the IFSC to take advantage of the less onerous regulation there. Thankfully, from an Irish perspective, it was bought by a larger German bank on the very eve of the outbreak of the global financial crisis. It promptly went wallop. The German government had to fork out €100 billion to prop it up. Had it remained under Irish regulatory control, the bill would have landed on Irish taxpayers. The sovereign would have been squashed long before that eventually came to pass at the end of 2010.
If there is another Depfa in Dublin’s docklands today or in the future, taxpayers might rue the day Michael Noonan didn’t sign up to the FTT.