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.
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/)
Download The Paper - LINK
