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Dodd-Frank Is in Trouble – and for Good Reason

March 27, 2018 in Economics

By Diego Zuluaga

Diego Zuluaga

If legislation were judged on length and complexity then the
Dodd-Frank Act, passed in the wake of the last financial crisis,
would constitute an unambiguous triumph.

Alas, the correlation tends to run in the opposite direction.
The US Bill of Rights, that most influential and long-standing of
modern constitutional documents, fits within a page of A4. The
post-2008 financial law, by contrast, is 849 pages long and
estimated to have introduced 27,278 new regulatory restrictions.

Just eight years after its passage, Dodd-Frank is unravelling.
Gone are the days when the Democrats held the White House and both
chambers of Congress — and when, buttressed by public ire
following the 2008 bailouts, they were able to pass the most
sweeping piece of financial legislation since the Great Depression.
President Obama then proclaimed confidently that “this reform
will help foster innovation, not hamper it… unless your business
model depends on cutting corners or bilking your customers,
you’ve got nothing to fear from reform.”

Dodd-Frank, in fact,
seems to have accelerated the decline of small U.S. banks by
indiscriminately piling new regulatory restrictions on
them.

But Dodd-Frank did much more than attempt to curtail bad
practices. It eliminated previous regulatory agencies and added a
slew of new ones. It established a fresh regime for banks deemed of
systemic importance. The law also altered mortgage lending rules,
seeking to better reflect the risk of these loans on bank balance
sheets. It introduced new regulations on consumer lending,
including a cap on debit card fees. It mandated the registration of
hedge funds and required added disclosures for traded
securities.

Dodd-Frank was a technocrat’s dream in its breadth and
scope. No crisis-era stone was left unturned, and a great many
other future contingencies were addressed.

But the results have been disappointing. A decade after the
downturn began, America’s biggest financial institutions are larger
than ever, accounting for 44 per cent of all bank assets. Dodd-Frank, in
fact, seems to have accelerated the decline of small U.S. banks by
indiscriminately piling new regulatory restrictions on them. Bank
entry, in particular, has ground to a halt, with new bank charters
falling from 100 a year pre-crisis to only six in the entire post-crash period. In
the meantime, 1,917 incumbent banks have disappeared as a
result of merger or failure.

High market concentration, on its own, is neither good nor bad.
Bigger banks are better able to diversify and take advantage of
scale economies. Moreover, there is reason to believe that America
has historically had too many, not too few, banks as a result of
state-level restrictions on …read more

Source: OP-EDS

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The EU’s Misguided Tax on Tech Giants Is Doomed to Fail

March 27, 2018 in Economics

By Ryan Bourne

Ryan Bourne

Amid the moral panic about “tech giants”, trust the
European Union to lead the way with a ham-fisted proposal to
“level the playing field”.

Politicians on the continent have worried for years about the
tax planning of these (usually American) super-firms.

Last week, they issued a proposal to deal with the perceived
problem: allow individual countries to tax the local revenues of
these giants at a three per cent rate.

The aim? To compensate for the fact that, according to the EU,
digital firms pay an effective corporate tax rate of 9.5 per cent,
compared to the 23.3 per cent faced by “bricks and
mortar” firms.

Developing a whole new tax base (revenues rather than profit)
for a relatively small number of companies seems a dramatic —
and arbitrary — course of action. And it throws up all sorts
of problems, some of which require further carve-outs and
convolutions of the tax system.

For starters, new, upcoming digital companies going global for
the first time would now have to navigate and structure their
businesses according to two completely different types of tax base,
beyond the ordinary compliance costs of operating across
countries.

This would be particularly harmful to small companies. Little
surprise then that the EU has introduced a threshold: companies
would have to have revenues of $750m worldwide and $50m in the EU
to fall under the regime.

But that’s just the half of the potential distortions. A
revenue tax creates a liability irrespective of whether the
business is making a profit or loss, heightening the possibility of
business failures.

In fact, it would be particularly destructive to digital
businesses with very high turnover but low margins, which is often
the case when firms are expanding and trying to build big
networks.

These are the questions
international tax lawyers are grappling with, and there’s no simple
or crude answer.

As the Institute of Economic Affairs’ Julian Jessop has
outlined, “a company facing an additional three per cent tax
on revenues but making margins of, say, six per cent would
effectively be paying corporation tax at a rate of more than 50 per
cent” — presuming they do not change their behaviour to
compensate.

The effects on innovation could be more broadly damaging.

Entrepreneurial new products or services bring with them
substantial uncertainty over whether they will be profitable or
loss-making ventures. Adding in a new tax cost associated with
revenue generated by a new idea could deter investment in new
services across the board.

One might consider all these effects a price worth paying were
this new tax regime genuinely “levelling the playing
field” for different types of business. That, after all, is
the stated aim.

But …read more

Source: OP-EDS