1.
Dr Micheál Collins
NERI (Nevin Economic Research Institute)
Dublin
mcollins@NERInstitute.net
@ MLGCollins
www.NERInstitute.net
How much would a
FTT raise?
NERI Seminar
10th February 2016

2.
Outline
1. Introduction
2. The EC FTT proposal
3. Modelling
4. Establishing a Tax Base
5. Net Revenue Yield
6. Sensitivity & Scenarios
7. Some Implications
8. Conclusion

3.
1. Introduction
• Proposals for a small tax on financial transactions
since the Wall Street Crash
o Keynes (1936), Tobin (1972),…
• Revived given origins of recent crash
• EC proposal in 2011
o No agreement…enhanced co-operation (11, 10 countries)
o 66% to fund EC budget
o Revised: now considered national revenue
• Change = important for Ireland
• Aim here: (i) tax base & (ii) net revenue yield

4.
2. EC FTT proposal
• Securities
o Shares and Bonds
o A tax of 0.1% (one-tenth of one per cent)
• Derivatives
o Exchange Traded Derivatives
o OTC currency linked Derivatives
o OTC interest, equity and commodity-linked Derivatives
o Credit Default Swaps
o A tax of 0.01% (one hundredth of one per cent)

5.
• Clever structure: triple A structure; hard to avoid…
• Yet some exemptions:
o In design and evolution…ongoing…
o Transactions of households, SMEs etc
o Gov. bonds and derivatives linked to sovereign debt
o Central Bank operations with EU entities
• Ireland
o Hesitant
o Not outright against; but cautious and sitting back
• EC plans
o December 2014; Portugal and Austria roles
o Aim to complete in 2016; introduce in 2017/2018

6.
3. Modelling
• A literature….
o Ireland: one CB/ESRI study in 2012
o EC Impact Study, Copenhagen Economics, DIW…
• Equation:
𝑅 = 𝜏 . 𝑉. 𝐸. 1 +
𝜏
𝑐
𝜀
where τ is the tax rate, V is the annual value of transactions
being taxed, E is the rate of evasion/displacement or
avoidance, c is the transaction costs and ε is the elasticity of
the volume of transactions in the market (post any evasion)
to the increase in taxation.

7.
4. Establishing a Tax Base
• A big challenge
• A lot of literature guidance to build from…
• 4 steps
1. Obtain data on each instruments turnover
2. Adjustment(s) of turnover figure if appropriate
3. Allocation of corrected turnover to domestic and
foreign (FTT, non-FTT) sources
4. Establish turnover relevant to calculation of Irish FTT
tax revenue

8.
Data
• Shares
o Central Bank Security Issue Statistics
o Average year to July 2015
o Turnover from World Bank WDI
• Bonds
o Central Bank + ECB
• ETDs
o No data
o CB/ESRI had value for 2010
o Combined with FIA Europe growth rates for 2011-2014
• OCDs (+CDS)
o BIS Triennial Survey 2013

9.
5. Net Revenue Yield
• To avoid double taxation
o Need to abolish stamp duty on shares
o Revenue Commissioners data to 2014
• +5% per annum to 2016
• €311.24m
• Revenue forgone
• Baseline Revenue
o Model and parameters
o Tax base

10.
6. Sensitivity & Scenarios
• A comprehensive sensitivity analysis included
• Why:
o Assumptions and uncertainties in tax base compilation
o Evolving proposal
• Look at:
o Variations in the tax rate
o Variations in the tax base
o Variations in the model parameters
o Other scenarios

11.
• If lower rate of ST securities = - €84m net revenue
• If lower equities base /turnover = - €90m / -€128m
• No evasion / medium evasion = +€195m / +€137m
• If include revenue to Ireland (+5%) = +€32m
• Remove most HFT = - €50m or - €70m
• Repeat CB/ESRI modelling = +€27m
• Assume ISE +33% = +€20m

12.
Plausible Scenarios x2
• the baseline parameters are used;
• HFT is almost eliminated and the evasion rate falls to 5% for
securities and 25% for derivatives; [2 definitions]
• there is an increase in turnover for the ISE – a 33% increase on
turnover following the reduction of HFT; and
• there is a flow of FTT revenues into Ireland equivalent to 5%
of gross FTT revenue.

13.
So overall, a range:
from €320m to €350m…

14.
7. Some Implications
• Looking at these under 4 headings
1. Scale and Incidence
2. Real Economy Effects
3. Stability and Knowledge of the Financial Markets
4. Allocation of Funds Raised

15.
1. Scale and Incidence
o A very small tax
o 0.07% effective rate
o Difficult to pass on
• €10m of OTC derivatives = €1,000 FTT
• Fraction of costs and charges
o Incidence likely to fall principally on financial institutions

16.
2. Real Economy Effects
o To be actual, but small
o It will
• Marginally increase the cost of capital
• Limited relocation effects, could be +/-
• Small direct employment effects; losses for HFT
• Marginally increase operating costs of financial firms and
reduce their profits

17.
3. Stability and Knowledge of Financial Markets
o Complement current EU reforms aimed at creating a safer
financial system
o Improve regulatory and societal knowledge
o Reduce short-term market volatility

18.
4. Allocation of Funds Raised
o Easy to collect (at source)
o Flows into central pool of taxes
o Merit in earmarking it
• Common theme in history of FTTs
• And for those proposing it
o Irish campaign 2015:
• 50% address poverty in Ireland; 25% ODA; 25% climate
o If domestic spend…the some economic benefits

19.
8. Conclusion
• As EC FTT proposal moves towards completion –
choice for Ireland
o Join or refrain?
• Ideally, an evidence basis for this
• Paper a contribution to this process
• FTT = revenue of €320m - €350m per annum
o Small but recurring
o Not a panacea, but…
• Some implications; but hard to argue benefits< costs

20.
Dr Micheál Collins
NERI (Nevin Economic Research Institute)
Dublin
mcollins@NERInstitute.net
@ MLGCollins
www.NERInstitute.net
How much would a
FTT raise?
NERI Seminar
10th February 2016