Don’t impose taxes on financial instruments for they promote economic development

Tuesday, 24 May 2016 00:02 - - {{hitsCtrl.values.hits}}

By R.M.B. Senanayake

The late N.U. Jayawardene was well versed in both the theory and practice or applications of economic principles. Whenever a minister of finance introduced a tax on any financial instrument he used to protest and many finance ministers did listen to his advice and removed such taxes at the earliest opportunity. But there is always a new generation of finance ministers who are not aware of such advice and ignore such advice because of their economic illiteracy.

NUJ’s argument was that if a tax is levied on a financial instrument it deters the free marketability of the financial instrument and people prefer cash. But the development of financial instruments reduces the demand for cash transactions and promotes the development of financial markets instead. The development of financial instruments reduces the demand for cash and promotes business since they become negotiable.

When a tax is imposed on financial instruments the parties to transactions seek to shift the tax and in the process the use of the financial instrument to settle transactions becomes less popular since the market participants then seek to shift the tax from one party to another and will not accept such financial instrument in the settlement of transactions unless they can do so. NUJ also opposed the use of the banks as tax collectors for the Government since the banks would shift the cost to the public and thereby be a deterrent to the spread of the banking habit. The spread of the banking habit promotes modernisation and development.

It is generally accepted In economics that markets promote economic development and the promotion of markets should be a goal of economic policy. Similarly financial instruments promote development when they are traded on markets for then the parties to economic activities accept financial instruments as an alternative to cash, thus promoting the development of such financial instruments. Developed countries have a plethora of financial products which smooth trade and payments.

So it is unfortunate that the Minister of Finance has imposed taxes on financial instruments which inhibit the development of financial markets in such instruments. He should raise tax revenue by some other tax on consumption instead to replenish the tax on financial instruments.