Trade of shares is going to be taxed by some countries inside the EU. The usual counter argument is that this will simply cause trading to move outside the tax zone to, in this case, the U.K. and the U.S. To try to get around this, the countries involved require that the tax be paid wherever the trade takes place:
The tax would be owed no matter where the trade took place, as long as a European security or European institution was involved. The law has been written so broadly that if a French bank bought shares in an American company on the New York Stock Exchange, the tax would be owed.
But who is going to report the trade? The EU authorities are relying on a prisoner’s dilemma to do the monitoring for them:
There is every chance that markets from other countries will not be very cooperative, meaning that to learn if a German bank traded in New York the authorities might have to rely on the bank to report it to them. But then there would be the risk that the tax authorities would learn of it otherwise, perhaps through an audit or from a report by an Italian bank that happened to be on the other side of that trade.
Mr. Bergmann, himself an economist, compared that to “the prisoners’ dilemma,” a classic concept in economics in which two people arrested for a crime would do best if neither confessed, but either would do very badly if he did not confess while the other did. If the authorities did find out, it would be tax fraud under the proposed law.
If the Italian bank reports the trade but the German bank does not, does the Italian bank get a reward? Is the tax forgiven? This is not clear from the article. (I also had a hard time finding the actual law but perhaps I did not look hard enough.) If the Italian bank is liable for tax if it unilaterally reveals the trade, then the game is a coordination game:
If the German bank does not reveal the trade, the Italian bank avoids the tax if it does not reveal but pays the tax if it does. Hence, not revealing is a strict best response to not revealing by the opponent. On the other hand, if the German bank is expected to reveal the trade, if the Italian bank does not reveal the trade, it pays a big fine. If it also reveals the trade, it just pays the tax. Hence, reveal is a strict best response to reveal. Then, the blog post should be called Coordination Games Everywhere.
Would love to know what the facts are. Or are they ambiguous? This would introduce uncertainty and then papers can be written about this possibly…
7 comments
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February 26, 2013 at 4:41 am
Johnt
For ‘Best’ read ‘most profitable’, if your conscience has no value.
February 26, 2013 at 9:58 am
WaltFrench
I’m thinking that cross-ownership of markets make the attempt to hide such trades an existential threat to the exchange itself. Aggressive enforcement, such as we DON’T see with simple posturing about tax havens, ought to be successful.
Then, there’d be whistle-blower laws such as we have in the US. Giving an internal person a multi-billion dollar incentive to report his/her firm’s law-breaking ought to make it impossible to hide them for long.
April 1, 2013 at 10:27 pm
Jihan
If they really wanted to make it a prisoner’s dilemma, they should structure it so that if both reveal, then they both pay the tax. But if but only one reveals, that one pays nothing (or even gets a bonus) while the other pays a large fine. This wouldn’t lose any revenue (assuming the fine is large enough to offset any lost revenue/bonus) while leaving an equilibrium at reveal, reveal.
June 20, 2013 at 9:49 am
d
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