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Have your say: Should we tax financial transactions or currency trades?
New Zealand's largest fishing company Sanford has called for a tax on foreign exchange transactions that aren't related to trade, arguing New Zealand's currency is distorted by foreign exchange traders. Sanford Managing Director Eric Barratt told shareholders at the group's annual meeting yesterday that it was time the government started making money from all the foreign exchange traders.
Barratt's comments follow similar calls from Progressive Party leader Jim Anderton for a tax on financial transactions and moves by British Prime Minister Gordon Brown and some other countries to impose a so-called Tobin Tax on financial transactions
Here are Barratt's comments in his annual address.
The crystal ball that can predict future exchange rates has yet to be invented and will never be when our exchange rate is not determined by the fundamental economics of New Zealand as a country compared to other countries currencies but by currency traders looking for safe havens to park large sums of money for usually very short periods.
A very small proportion of trades in New Zealand dollars are related to the basic trading in international goods and services. It is high time New Zealand as a country started earning some income from these currency traders that costs shareholders in Sanford and other trading companies many millions of dollars each year.
A tax on non trade related currency transactions could not only earn significant income for the government it could also result in our exchange rate moving closer to its realistic value and thereby add significant value to the wealth of New Zealanders.
My View
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It's true that New Zealand currency trading is way out of proportion to the underlying trade we do as a nation. We're regularly in the world's Top 10 most traded currencies, largely because there are so few freely traded currencies globally and we're one of the few. We also have a transparent market and are seen as a something of a proxy for trading a currency linked to soft commodities such as meat, dairy and fish.
I like the idea of a Tobin Tax, but in practice it won't work unless you can get everyone charging it. The Americans won't so it will never happen. Barratt's idea of a tax on foreign exchange transactions that aren't linked to real trade flows sounds like a nightmare to police. Who knows what is a 'real' trade and what isn't a 'real' trade.
I believe we're better off fixing the fundamentals such as our tax system, government spending and supply side issues such as labour and land than fiddling with currency controls like this.
Your view? We welcome your comments and insights in the comments below
26 Comments
Oh dear oh dear that's
Oh dear oh dear that's not gonna be good. One would hope the tax proposal would include tax write-offs for major losses incurred.
I think I may start trading in intellectual property rights....... yep that'll do it.
If the exchange rate movements
If the exchange rate movements are not a fundamental to this countries wellbeing then we are being rather selective as to what is fundamental, after all many people/business are put off exporting because of the lack of certainty vs risk of undertaking these activities as they can wipe you out as the gains and losses can be greater than the actual products exported.
Not sure if this is the solution and appears complex, but a small tax on all transactions, if that reduces the speculative exchange rate fluctuations should be better than the current scenario.
Yep John..... that would be
Yep John..... that would be digestable....... Sanford may want to remember key still has an awfull lot of connections in that world.
The exchange rate volatillity is
The exchange rate volatillity is surely a symptom rather than the cause? When overseas people buy NZD I'm sure that they don't just stuff the dollar bills in their mattresses. What NZ assets do they buy? My guess would be that they are buying short term deposits that flow on to the housing market, or buying government debt. If this is the case, then to deal with the problem we need to be borrowing less as a nation. The Government needs to balance its books, and the continuous asset bubble that is our housing market needs to be smoothed out (not to mention our dairy farms). If we address this, it will mean that there is not so much for foreigners to buy and sell, so our exchange rate volatility will reduce.
The Government can do a significant amount on the real causes, but addressing the symptoms is never going to work.
It's true that it won't
It's true that it won't work unless every country with free foreign exchange markets charges it, and there is no chance of that.
However it won't be hard to police. Charge the tax on every transaction and let those with trade flows claim it back with an invoice and a bill of lading (for goods) or proof of service delivery.
The policing problem would wane over time anyway. The tax would encourge companies in New Zealand to keep their Revenues in foreign currency. Eventually imports and exporters would pair up so their net long run FX activity was close to zero. Even if exempt from tax, the compliance means it would be much cheaper not to trade FX. Since NZ runs a trade deficit, it would end up being a disincentive on imports not matched with exports.
Maybe it wouldn't be such a bad thing.
It would also be a tax on foreign investment and remittance of profits.
If the idea is to target speculators, why not target derivatives instead? Traders also trade in derivatives, but not in great volume and the accounting rules require hedge effectiveness to be calculated anyway. So if we allow exemptions for hedges 80-125% effective (corresponds to the IFRS accounting treatment) it would not impose any extra overhead on companies, since they have to collect all the data and do the calculations anyway. This way trade in derivatives that creates risk (ie is speculative) would be taxed, while trade in derivatives that reduces risk (ie is hedging) would be tax free.
Its all a fantasy since the US will never do it. If they would just stop subsidizing risky behaviour that would be a good start.
Just got back from China
Just got back from China recently and noticed something that seems a bit odd. One would think that because our currency is so widely traded it would be possible to exchange NZ$ for Yuan in the country - but no, you can't.
Why's that? Anyone able to shed some light on this please.
before the introduction of GST
before the introduction of GST in australia they had transaction tax on most financial transactions,in and out of bank accts.I think it varied according to which state you held your acct in.it irritated the hell out of me and I closed the acct so maybe it would work.
That certainly has a fishy
That certainly has a fishy smell to it!
MarkS -- you don't have
MarkS -- you don't have to buy assets to trade currency. You just need a foreign currency account which is easy to get now. Just look at all the ads for seminars to teach you how to trade ( ie. join the casino and gamble ) currencies.
Eric Barrett is right in my view IF it can be done practically. ( eg. a hedge fund in the US trades a few hundred mill NZ$s --how is the tax collected ? ) Any banking experts out there ?
Maybe it is time to
Maybe it is time to review the whole floating exchange rate mechanism....
When one watches Global "capital flows", ...it kind of reminds me of a school of sharks hunting for fish.
The way Capital can Flow, and the amazing Quantities involved, it can be very destabalizing to smaller nations.
The way Global Monetary systems have evolved since America abandoned Gold in the early 1970s'... seems kind on "ad hoc".... ( just like Sanfords idea of taxing transactions)
They raise a really valid point ... but band aid ...ad hoc ..solutions may just lead to other distortions.
(I still remember in 1979, I needed reserve bank approval to buy a $100US book from USA.. I'm glad those days are gone )
As a kiwi Ive always
As a kiwi Ive always paid tax on any FX profits via my FX deposit and trading accounts (also claimed any loss) over the last 15 years.
@John: "Not sure if this
@John: "Not sure if this is the solution and appears complex, but a small tax on all transactions, if that reduces the speculative exchange rate fluctuations should be better than the current scenario."
"The way Capital can Flow, and the amazing Quantities involved, it can be very destabalizing to smaller nations."
Agree...this seems to be a good idea...someone making small and/or infrequent moves isnt going to be impacted much, speculators moving big sums in for a brief time and then out are....it seems to make sense.
regards
Yep, How about making them
Yep,
How about making them actually take physical delivery or conversely they must hold say 10% for x ammount of days.
Same goes for OIL and other commodities.
definately reduce destortion on prices and trading.
Any Ideas on this?
Is this an arguement for
Is this an arguement for protectionism? Protect your own currency? If you do not want other people to have it in order to look after yourself, maybe you just don't make it for sale?
Might have other spin off's, if the goverment can not get any external money then maybe they will have to spend less like on BB healthcare? A bit like not giving low income people credit cards....it is for their own good.....lol
The concept has some appeal.
The concept has some appeal. The big problem is that it will become a global tax collected by a global organisation (and the UN has eyes on it), and it will take us down the slippery slope to a global government. Already those who see the writing on the wall for carbon taxes as their funding source are switching to advocating a Tobin Tax (ie PM Brown).
Not a good idea.
I'm guessing this would adversely
I'm guessing this would adversely affect people working offshore and sending money home - admittedly probably mostly outbound from NZ to the Pacific Islands, but there are also people working in Australia sending money back home to their families in NZ... all of whom would presumably then end up with less money at the other end.
Cheers
Richard
the die-hard "speculation is bad"
the die-hard "speculation is bad" fallacy: Economic Fallacy II: Speculation is Harmful?
I was shocked by the
I was shocked by the statement. As CEO he is trying to shift the blame for poor performance. Absolutely appalling.
If I were the owner of a business this big and this exposed to currency changes I would be looking for someone who could identify solutions within his power not blaming something he does not understand. A CEO can run but he cannot hide. If he does not understand currency he should hire someone who does.
There are currency traders who understand what drives exchange rates and moreover they have concrete evidence that their theories are probably correct, as they test them with every trade they make.
This blame calling is why I don't own shares in Sanford. They don't know what they are doing!
On a lighter note I suspect that the good Dr Bollard has in fact quietly put in place a solution to the problem of the high NZD. By introducing a requirement for banks in NZ to raise more money in NZ (65% by April rising to 75% in the next few years, maybe more) he has put pressure on the NZD against those currencies the banks have been borrowing in. As they borrow more onshore they will be repaying debt offshore and so they will be net sellers of NZD. That's my twopenny worth anyway. I am not a currency trader so I don't know if this the right way to think about it but it suggests the kiwi will go down against the yen. Maybe I should buy Sanford shares after all...
Roger -- I don't think
Roger -- I don't think Eric Barret is shifting blame as you put it ( their result wasn't that bad ). Like all exporters the actual rate of exchange is not the important factor , it is the wild fluctuations that matter. It makes any sensible planning very difficult.
The currency traders don't know any more than most about what drives the movements -- in fact they have a vested interest in big fluctuations as that is how they can make money ( a stable exhange rate is no good for them ).
As for Sanfords not knowing what they are doing -- stupid comment given how long they have been successfully in business.
Disclosure -- I am not a shareholder or associated with Sanfords in anyway
A subject Im way out
A subject Im way out of my depth on....
About 6/9 months ago the RB anounced a nice little profit on currency exchanges ...
are they still trading and how are they doing now?
Or will we have to wait for the budget?
Thanks Ross I probably overreacted,
Thanks Ross I probably overreacted, it was just that I expect muttering from those on the shop floor and it sounded like "the government should do something about that" thinking. I expect more constructive thinking about how to solve a critically important issue from a CEO.
His strategy obviously isn't working to his satisfaction so my thought was he should improve his strategy.
Such a strategy might be
Such a strategy might be for example to buy small to medium sized Japanese companies with exports to NZ. I hear they are quite cheap now. Thus yen from fish are used to pay wages in Japan and NZD from export of Japanese company are used to pay wages in NZ.
A Tobin tax will only
A Tobin tax will only work if every country joined up to implement it. I somehow doubt that if a conference on climate change (arguable a slightly more important a subject) reaches no agreement and effectively breaks up in dispute, what chance has the Tobin tax of getting off the ground?
Waste of good brain energy even thinking it might work
The NZD is earmarked a
The NZD is earmarked a as commodity currency, a seriously tradable item around the world with the ebbs and flows of risk appetite and risk aversion. I would guess that 95% of NZD currency transactions are undertaken outside NZ, only the carry trade (eg Eurokiwi and Uridashi as an example) actually arrive here. I would suggest that a tax on NZ originated transactions would have no effect at all. I agree with sceptic on that one.
Currencies fluctuate - it happens
Currencies fluctuate - it happens - and it is healthy.
So what's the problem with simply reducing the risk by hedging?
While yes is sounds as though it could introduce a revenue for the government (in theory), in reality I cannot see international support so I cannot see it happening.
There is something about a tax on fx transactions that seems wrong to me, I understand a tax on say cigarettes, alcohol and petrol as there is a component of these products that is detrimental to the community so a tax needs to be gathered to help balance the negative aspects.
With an fx transaction, where is the negative aspect? Sure high kiwi $ is not good for exporters, but is good for manufacturers that import components - but the negative affects are not as direct and tangible as say cigarettes, alcohol and petrol.
A free floating currency is
A free floating currency is unusual, most countries don't have one. So the idea that 'currencies fluctuate' is only true for a very few currencies. China doesn't have one and it is doing quite well . sort of.
The idea that a Cheif Executive can do anything about it I would say is quite wrong however moving the legal entity of the business to a country with a stable currency could help, maybe China would be good?
Currency traders risk absolutely nothing every day beting on the New Zealand Currency. They are just palcing bets with ther peoples money.
Traders don't have to hire people, build plant and equipment , plan for the long term etc. Trading is easy with someone elses money, building a business out of NZ is not. With the NZD moving as much as it does NZ companies are up against it. A New Zealand company with a small home market that tries to compete internationally has to do so with a moving target of a currency vs their competitors with a large home markets to cushion the business. NZ Co simply doesn't stand a chance.