11 Feb 2012

How the FTT mechanism could eliminate the curse of tax-havens

Most people agree that the existence of tax-havens is a major problem. I've seen figures suggesting that multinationals have several tens of trillions of dollars stashed away in tax-havens to avoid paying tax. That money is not being used for anything useful. So, how can we get that money back into the real economy?

Well, those of you who have been following my story will know that I would like to see governments introducing a flat-rate but variable financial transaction tax on all electronic transfers. The rate could be fixed separately for each country and  the idea is that both the sender and the reciever should pay. Thus, in a country like Greece that has a severe revenue problem, the rate might need to be set at a relatively high level whereas it might be substantially lower in a country like Germany.

Suppose the rate was 1% in Greece, and 0.1% in Germany. Someone making a payment of €100,000 from Greece to Germany would thus pay 0.5% (€500) to the Greek government, and 0.05% (€50) to the German government - a total of €550. Paying the same sum in the other direction would generate the same sums. Obviously, paying the same sums between two German-based accounts would only cost €100, compared to €1000 for making the same payment in Greece.

Such differences are not a problem. If the Greek government needs more money to pay off debt, then there is nothing abnormal about them charging more. And, yes, German businesses would have a small competitive advantage. The cost of exporting from Germany would indeed be 0.45% less than exporting the equivalent goods from Greece. But, that is no big deal.

Now, what would be the situation if a payment was made with a country that did not have a financial transaction tax mechanism in place? Take, for example, the transfer of money to an off-shore tax-haven like the Cayman Islands. Obviously, there are many options. But my proposal is that the cost of transfers to the tax haven should cost double. Thus anyone trying to move €100,000 from Greece to the Caymans would be required to pay €1000 to the Greek government.

I would also propose that transfers from the offshore tax-haven into the FTT zone could be zero rated. This would mean that anyone with money currently in such centers would have a strong encouragement to move their money back into the system. This would be especially attractive if the country in question had used the FTT mechanism to abolish taxes on company profits. This is why I was claiming in a recent post that the first country to implement such a scheme would have a real advantage and could potentially reap a huge financial reward. Even if a multinational that decided to move their profits into that country for free, any attempts to move the money elsewhere would automatically generate extra revenue for the government. You couldn't lose.

I really do think that this make real sense. When will someone in power see the light?

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