Guiding money flows via transaction taxes

This is already a bit outdated, but since Walter Blackstock took now an interest in the question why economic questions and regulations, like greek taxes should be discussed on Azimuth, I would like to repost a question which I had sent to the apparently now not anymore existing blog thinkspace at the website openeconomics.net and to which I hadn't gotten any comment or answer. The question was also posted on our own blog in a blog post from 2011.

I had thought about wether this should go into an Azimuth project page, but since I got no answer I refrained from doing so. The reason is that I think that the below concept is rather obvious so that it is most probable that it exists under a special name (which I do not know) in economics circles and it would be rather misleading to come up with an invented naming for it. So I repost this here.

I am having a question for a macroeconomics expert.

There has been recently a lot of discussions about the Euro and I read quite some essays and komments that the idea to have a common currency in Europe was a bad idea from the onset on. The main argument here seems to be that with national currencies you have more options to regulate economic flows. In particular if a country is in trouble then making its currency cheap means that goods are getting cheaper as seen from outside of the country (so export raises, which supports the inside economy), moreover investments from outside are more encouraged, as labour looks cheaper from outside etc. And hence, since economies in Europe are different, especially people from overseas argue that it was not a good idea to take away the instrument of money regulation via national currencies within Europe.

I got the impression that people from overseas may oversee here often a bit the political and cultural dimension of the Euro. Apart from this it should also be mentioned that currency speculations can also harm a country. I felt that these points in defending the Euro are often left out, moreover I was asking myself to which extend other regulatory measures than national currencies are discussed within economic circles.

In particular I was asking myself in how far the idea of a kind of “financial transactions tax transfer for money flow regulation” was discussed or wether this is a stupid idea.

What do I mean by a “financial transactions tax transfer for money flow regulation”? Lets assume that you have a tax on all money transfers which go out of a country*. That would make imported products inside that country more expensive, so one can assume that people in countries would like to avoid that in generally (its a bit like customs). Lets assume that at the same time you get a bonus on all money transferred into that country. That would make investments and products of that country look cheaper from outside the country, so export would probably be supported by such a measure. Lets call this combination of tax on money transfer to the outside and bonus for transfer to the inside a “money transfer valve*”. Since most money transfer is done electronically, it should be technically not too complex to install such a “valve”*.

The money from the tax could be used e.g. for paying debts of that country in trouble, but now where should the money for the bonuses come from? There had been a lot of discussion about financial transfer taxes and it seems especially Britain and the US are opposing this idea (last but not least to some extend this may also be due to the big financial market places in London and New York). Maybe it is possible to find a compromise on that question by transferring the income of a financial transfer tax to bonuses for “valves”. In some sense the financial system would then care more about the stabilization of its money flows.

I haven’t read about such a proposal, but I am not in economy so I may just not have noticed this. In particular it would be quite a wonder if such a financial instrument would be called “valve” (sounds too much like plumbing…. :) ) moreover it is of course very likely that I have overseen crucial arguments and that the whole thing doesn’t work for such and such a reason. My approach here may be too simplistic and I have too admit that I haven’t thought about it as profound as I probably should, before posting here. On the other hand who knows eventually you may find my comment useful. In short: I don’t want to spend too much time with these economic questions, I just see that they influence our lifes wether we want that or not. So it would be nice to hear briefly what you or others here know about a financial instrument like the one above.

*I am aware that this may lead to a “black market”, i.e. mechanisms which would try to circumvent the tax. However I think the scope of such a “black market” depends also on the size of the tax and the feasibility of circumventing the tax. The origin of a good is usually rather well documented. Likewise people may try to illegally get money out and back in again. However here the scope of such actions could be limited e.g. by specifying possible targets of money transfer, like that a bonus on a transfer is only paid in case that you buy existing products, which were produced in the country.

**The term “valve” is here not optimal since the mechanisms of a valve is a bit different from what I decribe here, which is rather something like a lock with the possibility to “pump upstreamwards”. Whatsoever, I found the ambiguous english word “lock” even less suitable for the purpose.

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