Financial Transaction Tax

Hey Cliff,

I’m not sure if this has been addressed or not (no results showed up when I searched for it), but now that the game has been made somewhat more challenging with the recent changes, it might be worth adding some additional and pertinent revenue sources for players to choose from.

One that I desperately wanted in Democracy 3 and that I hoped would make its way into Democracy 4 is a financial transaction tax. Originally envisioned by Keynes, it has more recently made appearances in the aftermath of the Great Recession as a way of dealing with speculation in financial markets while simultaneously raising revenue for governments. Some countries already have a version of such a tax, while the European Union has been looking to introduce it for some time now.

It could bring in a moderate to high amount of revenue, depending on where the slider is, with the following effects:
-Slight to moderate decrease in GDP
-Slight decrease in business confidence
-Detrimental effect on capitalist, wealthy opinions
-Increases tax evasion at higher levels

Along with any other effects that you might find appropriate.

Cheers!

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Is it a universal tax on ALL financial transactions, or only on large transactions?

If it’s the former, I’d imagine everyone would be upset.

I’d also consider making it increase Internet currency adoption substantially, for obvious reasons.

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Good question. There are many different implementations and proposals for the taxation of financial transactions, but the most common one seems to be a very small percentage (typically less than 0.1%) on most financial transactions on the market (buying/selling of stocks, derivatives, etc.). Because the volume of these transactions is so large (tens of trillions of transaction a year globally), this has the potential to raise good sums of money without risking economic growth too much (other than a drag on GDP as a result of fewer financial transactions carried out by banks and speculators). The other risk of a financial transaction tax is the potential for slightly lower liquidity (meaning cash or cash-equivalents) for companies, which would be reflected by a slight negative impact on business confidence in-game.

I disagree that it should upset everyone. The vast majority of ordinary individuals would not be directly affected by this tax, except for those with direct stock market holdings. However, even the vast majority of those with stock holdings would likely only be paying a couple of dollars/euros/pounds extra a year because of this tax, since the tax rate is so small. The main impact would be on speculators and high-frequency traders who carry out trillions of trades a year.

Yes, I agree about the internet currency adoption impact as well, I had overlooked that.

Thanks for the explanation. I was honestly thinking it was a tax on ALL transactions, period. That is, buy a soda, pay the tax. Send money to a friend, taxed. Pay your own bills, taxed. It if worked like that, then it would indeed upset everyone.

Now that I properly know what it is, I’d have to say that I agree with you. Perhaps it could reduce the odds of a flash crash, same as “Limit Automated Trading”, since this tax would likely reduce the number of overall trades thus reducing the odds of such a crash.

Thanks for mentioning this. I;ve been aware over the years of calls for a financial transaction tax, especially because I’m from the UK and used to work in trading floors in London :smiley:
I definitely think we should add it, and I’ll make a note on the trello board to put it in…

Its a bit of a weird one though, because generally when I’ve seen it suggested its very targeted at the exact sort of thing the city of london banks do a LOT of, which is exchange trade trades in the very short term, and complex options and other derivatives.

Although there is a LOT of that, in financial centers like London, New York etc, I’m not sure there is really any firm reason those transactions take place in specific geographic locations. In other words, if London introduced a FTT, would all of the financal activity just swicth to New York, or Hong Kong? and if so, would it actually raise any revenue?

Nothing is as liquid as capital, and people can trade derivatives anywhere in the world. There are even stocks listed on multiple exchanges. If you pay more tax to buy/sell stock in city A…then just do it in city B instead?

Thats my concern about whether or not its a workable policy, although I’m happy to find out more about it.

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Unfortunately, as is the case with most taxes, it is definitely not fool-proof. Depending on the proposal, there is definitely potential for an FTT to cause “off-shoring” of transactions. However, most proposals and forms of FTT in existence (such as the UK’s stamp duty or Switzerland’s FTT) work on the basis of the location of either the company or party to a transaction, which helps to avoid any major offshoring. For example, if either the buyer or the seller (typically a broker) happens to be located in the country that levies the tax on the transaction, then the tax will be levied, regardless of where it actually takes place. There are many different proposals for how an FTT would be levied, and the consensus seems to be that it would be most effective in an international setting, such as an OECD or EU-wide FTT (which has already been approved, but yet to be implemented) to avoid any serious distortions.

The general consensus among economists is that there is a potential for some negative effects on liquidity depending on its implementation,but overall, an FTT, if implemented at a low enough rate and in a comprehensive enough manner to ensure there are no workarounds, can be an effective way to raise substantial revenues for governments without any serious detrimental effects.

Edit: If you would like some advice on the implementation of an FTT, I’d be more than happy to give some suggestions. I am an economics student in uni, and one of my major research projects involved looking at the feasibility of an FTT in a Canadian and international context, so I probably know more than I should for my own sake about this damned tax. Which is why I’m happy to see you are going to add it in :stuck_out_tongue:

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Ha cool.
I’m thinking it it only raised a small amount, or if it had a really skewed impact, so it would reduce GDP quite noticeably at the high end, and was itself raising an amount skewed by the current value of GDP, it would be self limiting, so kind of like a scaled down corporation tax, maybe at 1/10th the income from that?

Obviously a big negative for the wealthy, and capitalists, a big upvote from socialists. I would imagine it would require a lot of political capital to introduce, due to lobbying, and likely have a bit of a hit to business confidence? maybe a slight input to the corporate exodus situation (for financial firms)

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It would be really cool to see the new non-linear equation mechanic (like how the nuclear fission cost goes up exponentially) implemented for this tax, because it has the potential to raise a lot of revenue at higher levels, with obviously more detrimental economic effects. So for example, at low levels it might raise 1/10th of corporate tax, but at higher levels it would scale up to 1/5th or so (perhaps at higher levels you’re taxing more types of financial transactions), but with a much larger negative effect on GDP and business confidence. It would be pretty cool to see that, and it would be realistic too, as there is potential for a great deal of revenue - and negative economic effects - if a high FTT is implemented. And yes, absolutely, there should be an input towards corporate exodus at higher levels, though it would be minimal if the tax is at a low level.

I’ve already added this for the next update, but it will need some tweaking and improving. I set it currently to max out at 1/10th corp tax, but its scaled by GDP, so the negative effect will mean effectively there is a curved income equation from it
I must remember to add a corporate exodus effect if not already in

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I definitely got Corporate Exodus in a previous version of Dem 4, but on 1.09 when I got the squeeze the rich achievement and it never popped? (Assumed I sidestepped it by nabbing Capital Controls mid-game)

Yup that sounds right, I think capital controls exists specifically to prevent that, and possibly brain drain.

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