9 Jan 2012

Radical new ideas for using an FTT in France

(Cliquer ici pour une version en français)

There's a second really exciting development that could mean that France could play a vital role in the revolution that the current financial crisis requires. It's the recent announcement that Nicolas Sarkozyis not only pushing very hard to get a Financial Transaction Tax introduced, but that he is prepared to go it alone if necessary. I'm sure that this is largely electioneering, but he does appear to be serious.  At the same time, there has been much talk about the idea of replacing the charges that employees and employers have to pay for everyone working in France (les "cotisations sociales") with a "TVA Sociale". It's an idea that was introduced in Germany as a way to cut employment costs and boost exports, but in France, where exports are a much smaller part of the economy, it would be a total disaster. A further 3% of VAT (apparently the number being discussed) would kill off consumer demand, triggering an even bigger recession.

So, here's an original suggestion. Why not combine the reduction or abolition of the "social charges" that cost so much with Sarkozy's proposal for the introduction of a Financial Transaction Tax? Currently these "cotisations sociales" raise about 386 billion euros a year. 164 billion are for health, family benefits, training and so forth, while 221 billion go towards pensions and unemployment benefits (I got the numbers from the fascinating book by Camille Landais, Thomas Piketty and Emmanuel Saez, called "Pour une révolution fiscale - un impot sur le revenue pour le XXIème siécle").

With visible financial transactions running at about 268 trillion euros a year in France (the figures are from the BIS preliminary report for 2010 that came out last september), a modest FTT of just 0.1% would allow one of the components of the "cotisations sociales" to be scrapped entirely - without the need to impose an increase in VAT.

But there is a second possible role for an FTT. And here again, France could be the country that could be the spearhead. In my recent post, I have been arguing that the French government should borrow money from the ECB at the same very favorable rates that they offer commercial banks (about 1%) by going via a "publicly owned credit institution", namely the Caisse des Dépôts. Such structures are allowed to borrow money from the ECB, a fact that is a very well kept secret. The reason is simple. By forcing governments to borrow via banks, those same banks have been able to gobble up 3.73% of Eurozone GDP in interest charges over the last 15 years, a rate that has now increased to an incredible 4.25%. Is it any surprise that Mario Draghi, the new head of the ECB, and who was previously European Director for Goldman Sachs, the bank known as the "blood-sucking vampire squid", should have imposed a veto on any such lending to governments? Could it possibly be that he is acting to  protect this extremely lucrative operation for his ex-bosses and the other parasites in the banking sector.

Citoyen Naif, one of the commentators on my  "Eureka" posting, pointed out a potential problem. Those "publicly-owned credit agencies" have to back up their loans by providing suitable collateral. And guess what, it is the ratings agencies that normally give the accreditation. When I saw that, I thought, Jesus, they have thought of everything. Moody's, Standard and Poor, and Fitch's could decide that the collateral was not sufficient for the Caisse des Dépôts to borrow the 1.59 trillion euros needed to pay off the banks. We're still on the hook.

But then I looked at the details of the agencies that are allowed to asses credit worthiness according to the Eurosystem credit assessment framework (ECAF). Alongside the standard ratings agencies we find five Inhouse Credit Assessment Systems (ICASs), one of which is.... La Banque de France!  I'm sure that the Banque de France would be in a position to give a suitable credit rating to the assets proposed by the Caisse des Dépôts!

There's one other issue. How should the French government pay back the 1.59 trillion euros to the ECB? Do they take out a three year loan and then say that it will all be paid back on the last day of the term, as governments typically do now with the bond markets? Such a decision would be pointless, because it would simply maintain the current insane system where governments are continuously having to re-borrow money to pay off the last loan. Three years down the road, the French government might have to go on its knees to the markets again. Very bad idea.

I have another suggestion that will fix the system for good. The French government should  pay the money back over a fixed period using an automatically varying Financial Transaction Tax, whose rate is continuously modified to guarantee that the payments are made. Apart from anything else, this is an absolutely cast iron guarantee because the mechanism could be written into the statutes.  And it would even make it easy to impose a Golden Rule for the public accounts, one where revenue is guaranteed to match expenditure.

Suppose that we want to pay back the 1.59 trillion euros over say 10 years.  That would require paying back about 160 billion euros a year. With visible transactions of around 238 trillion euros a year, this could be done with an FTT of just 0.07% - a value hardly larger than the 0.05% that Nicholas Sarkozy is proposing.

When I think about it, this makes so much more sense that the current system that was clearly invented by the banking industry to allow them to siphon off as much money out of the economy that they possibly can. And so far, they've got away with it. But a system that runs on continuous debt is like saying to a young married couple that they can have 1 million euros to buy a house, and saying  that they should pay back the entire sum on the last day of the loan with 3.7% interest. Of course, they will be very tempted to forget about the loan for 10 years and then discover that instead of having 1 million to pay off, they have 1.44 million to pay. It's the famous debt spiral that has made the entire financial system completely unbalanced.

No, that is senseless. You should pay back the money you owe bit by bit, every month, until at the end of the 10 years you owe nothing at all. If an FTT at 0.07% isn't enough to generate the 160 billion a year that is needed, then it can easily be increased. Who would even notice if it doubled?

Clearly, applying a variable rate FTT would make the repayments to the ECB absolutely trivial to  implement. So, can anyone give me a good reason whywe don't do it right now?


  1. Of course a tax on transaction might decrease the overall amount of transactions. But I think there would be an optimal level of tax to get the maximum revenue.

    Then everything seems possible. With 100 times the GDP in financial transactions, even a minute percentage in tax would buy you a social welfare state, a military, whatever you want. At the same time you could be completely debt free. As a next step why not buy back Louisiana :-)

    On a serious note, this could be exactly the way how a booming financial sector can be socially valuable. Even speculations would contribute.

    I would compare it to the way the National Lottery in the UK is used to fund arts projects and museums. 

  2. Thanks Christian for the comment.

    Yes, I agree that almost anything seems possible. My big proposition is that you can realistically imagine abolishing every single tax but one - no more income tax, VAT, social contributions. I would happily abolish taxes on company profits too - since they are just a licence for tax evasion by multinationals. Have a look at my paper on the subject if you find the idea appealing.