By Yawei Zhang
Ph.D. Candidate, School of Civil, Commercial & Economic Law,
China University of Political Science and Law, Beijing, China
Image Attribute: China- stock market traders hoping to make a win. (Screenshot/YouTube)
As the traditional partition, the tax collected on stock market around the world can be generally divided into four categories. The first type is the tax for IPO, such as the registration tax on stock and debt market in Ireland and England. The second type is the tax on stock exchange, which belongs to the circulation tax. The income tax levied on the stock exchange income is the third category of stock market tax, which includes tax for the stock interest income and the taxation on the capital gains of the exchange. The last kind should be the property tax on stock, such as the gift tax or the legacy duty.
The taxation focus by this article would be the second type, which is the specific circulation tax collected on personal or institutional stock exchange act. The origin of the stock duty could be traced back to 1694 in England, which was the stamp duty collected by the UK government in the London stock exchange bourse. The earlier stock transaction tax theory should belong to the theory of levying certain taxes on stock transaction put forward by famous British economist Keynes in his work The General Theory of Employment, Interest and Money after the great depression in 1936. Keynes believed that such tax can control the excessive speculation behavior of financial traders with no information while increasing speculation cost, so as to finally reach the objective of guiding investment to real economic production sectors and decrease economic fluctuations. Among the countries that still keep stock transaction tax, most of them set lower tax rate. Relative to its financial income function, the macro control function of stock transaction tax is generally more and more paid attention to. The practice of stock transaction tax is the implementation of securities stamp tax system. Although literally stamp tax should not belong to stock transaction tax, but in terms of China’s current system, there is no difference between stock stamp tax and stock transaction tax in taxpayer, tax base and taxation basis. Thus it can be deemed that stock transaction stamp tax levied by China at present is in essence one kind of stock transaction tax. However, as China just levies stock transaction stamp tax targeting at A and B share market, the stock stamp tax levied by China at present is one kind of stock transaction tax to a great extent.
As to whether China should continue to implement the prevailing stock stamp tax system, there mainly exist the following three problems. Firstly, whether there exist deficiencies in the formulation and adjustment of Chinese legal system on stamp tax. Secondly, whether stamp tax has the problem of unworthy of its name under no-paper transaction mechanism of secondary market. Thirdly, whether stock transaction tax in China can exert its due role in restraining market fluctuations, as well as its influence on market efficiency.
With regards to the first issue, China’s Provisional Regulations on Stamp Tax has been implemented since Oct 1, 1998, but such regulation failed to make corresponding adjustment as per Legislation Law after it came into effect. In legislative power, it is contrary to the regulations of Legislation Law. More importantly, its successive tax rate adjustment was often conducted by Ministry of Finance via a paper of document, which obviously violated relevant regulations and rule of taxation by law of Legislation Law, and also seriously not in conformity with the concept of “rule by law” emphasized by China at present. As per the regulations of article 8 of Legislation Law, the matters concerning basic economic system and basic system on finance, taxation, customs, finance and foreign trade can only be regulated by law. The levying of stamp tax and its tax rate adjustment undoubtedly involves the basic system of taxation, and should be regulated by law or at least regulated by formal administrative law via authorized legislation, while not be meddled by a paper of document of Ministry of Finance or provisional regulations.
Currently under the background of generally implementing no-paper transaction in Chinese stock market, the transaction taxation on secondary stock market in China still adopts “stamp tax”, such nomination indeed deserves deliberation. Stamp tax should be one act tax levied on the act of underwriting and accepting the vouchers with legal effect in economic activities, and it was paid via the form of pasting stamp on transaction vouchers originally. However, the stamp tax levied by China targeting at secondary stock market transaction is in essence, completely conducted under no-paper electronic transaction, thus the name of “stamp tax” seems to be in name only.
In the aspect of the macroscopic readjustment and control efficiency of the stamp tax, the current most powerful theoretical support of the waving restrain function of the stamp duty is which presented by the famous Nobel prize owner James Tobin in his Janeway speech in the Princeton University. At this speech, Tobin initially suggested to levy a currency transaction tax to financial transactions.Then, Tobin specifically analysis this type of tax in his book “The New Economics One Decade Older” in 1974.He thinks that due to the distinction of the fluctuation, compared with the financial market, the product market and the working market would respond less sensitively to the price signal. Therefore, after the speculation in the international capital market, it would finally lead to the distortion of the goods and labour service market and to some extent damage the whole welfare of the society.Apart from that, this tax could also restrain the short time speculation by improve its capitalized cost. And finally lower the flowability of the global capital market and maintain the stability of the financial market. And the part of academic circle who support to using the stamp duty as a unregulated policy for restraining speculation exchange and encouraging long term holding and value investment.
Seen from this point, market cannot allocate resources effectively. What’s more, investors are not fully rational. The reason is that there are mainly two kinds of traders in the market. One is the “informed transaction party” who is of higher investment level and has sufficient information. And the other is “noise trader” who conducts transactions blindly with insufficient investment approach. The “informed transaction party” usually can hold the real market situation and conduct effective “value investment”. On the contrary, the “noise trader” always follows the other traders frequently and goes after the rise and fall of the market due to the lack of real information and investment knowledge. In the market which is dominated by “noise traders”, the security prices tend to fluctuate easily and “Herd Effect” will be formed easily. At the same time, stock transfer tax can effectively restrain the frequent non-rational transactions through increasing the cost of single transaction. And it encourages long-run holdings and value investment, which can greatly help stabilize the market and reduce non-rational market fluctuation. However, some opponents hold that the stock transfer tax can better restrict the opportunistic practices of “noise traders” only in the market where the “informed” professional investors are in the minority. In the market where the professional investors are in the majority, the stock transfer tax is inclined to make the price deviate from the stock value and then increase the price fluctuation because of the increased transaction cost instead of smoothing out volatility efficiently.
In 2003, the third annual report of the International Monetary Fund Research Conference clearly pointed out, “Considering such elements as microstructure, assets pricing, rational expectation and international finance, we believe the stock transfer tax does not mean to ‘throw sands’ to the wheels of financial market but ‘pour sands’ into the engine of the market. Therefore, our conclusion is that transaction tax has negative impact on price discovery, market fluctuation and market energy. And it leads to the reduction of the information efficiency of the stock market.” The report of IMF also discovered that the stock transfer tax was not lowed because of the fluctuation brought by the “noise” transaction. Instead, it increased the frictional force of price discovery mechanism. There was no doubt that this conclusion denied the core effects of stock transfer tax. In the meanwhile, many researches of the domestic scholars deny the significant correlation of current stamp duty with the market fluctuation. Here into, the representatives are the statistical test adopted by Fan Nan and Wang Liping, the introduced GARCH-(generalizedautoregressiveconditionalheteroskedasticity) model, the empirical research on the samples of the data in Shanghai and Shenzhen market (A share and B share) as well as the research method of stock turnover rate adopted by Guo Qi. The former empirical result indicated that the up-regulation of stamp duty would lead to the improvement of market return volatility and the down-regulation would lead to the reduction. For this reason, to reduce market volatility and the volatility of the revenue of noise traders, the government should further down-regulate the stamp duty rate so as to improve the market efficiency.
Besides, the conclusion of the latter one has two sides: on one hand, the adjustment of the stamp duty rate has significant impact on the stock market volatility in a short period; on the other hand, in a long period, the down-regulation of the stamp duty rate in the stock transaction has no significant impact on the volatility of the A share market in Shanghai and Shenzhen.
This article is an excerpt taken from a research paper, titled – “The Function and Developing Direction of the Current Chinese Stock Duty” published at International Journal of Marketing Studies; Vol. 7, No. 4; 2015 ISSN 1918-719X E-ISSN 1918-7203 Published by Canadian Center of Science and Education, under the under the terms and conditions of the Creative Commons Attribution license (http://creativecommons.org/licenses/by/3.0/)
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