Capital Transfer Securities

A way to support domestic industries and control capital flows.

I. The Problem

Supporting domestic industries, controlling capital flows and maintaining currency values are perennial international economics problems.

Supporting domestic industries with tariffs and subsidies is banned and contentious.

Maintaining currency values and controlling capital flows by raising interest rates, expending foreign exchange to purchase the domestic currency or employing crude capital controls can all be counterproductive and untenable.

Better solutions are required.

II. The Solution

These problems can be addressed by Capital Transfer Securities (CTS).

CTS is implemented by a Balanced Capital Transfers Law.

A Balanced Capital Transfers Law states:

1) The act of transferring capital out of the country creates a Capital Export Security (CES) which notates the amount exported. The CES, which is owned by the capital exporter, is taxed at a percentage of the value of the transfer. That percentage, X, will be set and adjusted as necessary, by the Central Bank.

2) The act of transferring capital into the country creates a Capital Import Security (CIS), owned by the capital importer and which notates the amount imported. It is not taxed.

3) The tax paid on the CES can be refunded by holding an equivalent amount of CIS. The refund cancels the matched securities.

4) All CIS and CES will be recorded by a central entity to facilitate trading.

5) Anyone can buy and sell CTS. This facilitates a robust market.

III. Trivial Example and Rationale

For example: if X were a very high 50%,

1) if Capital Exporter A exported a trillion dollars in capital, they would be taxed 500 billion dollars and also accrue a 1 trillion dollar CES.

2) If Capital Importer B imported a trillion dollars in capital, they would accrue a 1 trillion CIS.

3) A would desire to have his tax refunded. If he could induce B to sell him his CIS he would be able to get a full refund.

4) If A could only get B to part with 800 billion in CIS, he could only claim back 400 billion.

What does this accomplish?

There would be a market in CTS.

If goods imports exceed goods exports, the supply of CIS will be exceeded by the supply of CES, which will cause the price of CIS to rise and therefore make goods exporting more profitable.

Conversely, if goods exports exceed goods imports, the supply of CIS will exceed the supply of CES, and the price of CIS will drop, providing little benefit to the goods exporter.

Thus you have an explicit self regulating mechanism to keep capital flows balanced and an implicit self regulating mechanism to support exports.

IV. Affecting Currency Trading

The above assumes that goods exports cause capital to be imported and goods imports cause capital to be exported. This is not always the case and other forces can cause capital transfers, but capital flows are a good representative substitute for goods trading.

CTS could help many countries seeking to either capture inadequately taxed profits; support domestic industries or restrain capital flows, all in an elegant seamless manner.

If the CTS implementation includes not just capital imports and exports but also conversions to another currency, that has the side effect of making currency trading much more risky. Such moves as currency traders breaking a central bank would be much more risky and, possibly, impossible. With currency traders sidelined, changes in currency values would reflect genuine economic activity.

V. Implementation

Not all transfers should be securitized. Sums small enough to fund a reasonable vacation might be excluded, to avoid negatively affecting the average vacationer. Everyone would get an annual exception for personal travel.

The potency of CTS varies directly with the size of X. This attribute allows easy adjustments to achieve the desired effect. To acclimate the financial system to CTS, implementation could start with X set to a low .5% or 1%.

CTS is an elegant solution that can be efficiently implemented at financial institutions. It solves many problems that have been inadequately addressed.

VI. Possible Scenarios:

The exact effect of CTS is difficult to predict because the effect depends on psychology as well as profit motive. These are some possibilities.

1) Goods exporters accrue significant CIS and of course want to maximize their value. If they think the central bank will raise X, thus increasing the value of CIS to owners of CES, they may decide to withhold the CIS from the market. Alternatively, if they need cash flow, they may seek the best immediate deal.

2) Goods importers accrue significant CES and want to maximize the refund. If they think the central bank might raise X, they are likely to sell for the best immediate price, since in the future they could be outbid for the available CIS. Conversely, they might wait if they expect X to decrease or if exports relative to imports are increasing.

3) Foreign entity wants to import capital for investments. They receive CIS. Essentially they receive a boost in the value of the transfer, if they immediately sell the CIS. Repatriating the money will cost them X, so the expected movement of X may affect their decision. This dynamic encourages domestic investment.

4) Goods importer pays foreign seller by depositing cash in a domestic account. No CTS issued.

5) Goods importer pays foreign seller with offshore funds. No CTS issued.

6) Disgruntled countries complain to WTO. WTO cannot do anything since CTS is not necessarily affecting trade, as seen in example 3, 4 and 5. But, ultimately, any domestic funds a foreign entity wishes to receive will accrue CES.

6) Central Bank notices that imports far exceed exports and that even though the economy is generally good the exporters are struggling. They raise X and perform economic Jiu Jitsu, transferring some of the goods importing energy to the exporters. Export industries hire people and the economic benefits of the robust economy are more widespread.

7) Central Bank notices exporters doing fine, economy fine, everything fine, drops X to close to zero.

8) Central Bank notes the currency is under attack by currency traders and raises X significantly. This alone makes the attack more costly if the traders are borrowing the local currency and using it to buy foreign currency. Central Bank may even disallow refunds of CES to large scale currency traders. Raising X may cause a capital inflow as foreign capital seeks to accrue now more valuable CIS, thus raising the value of the currency, foiling the attack and inflicting losses on the traders. Raising X essentially recruits another group of foreign exchange traders to work against the attacking foreign exchange traders.

9) Currency is overvalued and the exporters are struggling but the government does not want to risk “world reserve currency” status by devaluing. Central Bank raises X to give a boost to exporters and domestic industries overwhelmed by competition from undervalued currency countries.

10) Goods importer accrues significant CES. Seeking to maximize the refund and having skills in international trade, realizes that instead of purchasing CIS, it would be more profitable to export products and accrue CIS that way, thus stimulating domestic industry. Alternatively, may just keep the capital in the country and invest it there, also stimulating the domestic economy.

11) Capital flight is causing severe liquidity issues in a country that is part of a shared currency zone. The Central Bank, which cannot print money, raises X significantly to slow down the capital flight and provide an inducement for capital repatriation.

12) Entity accrues significant profits and pays no taxes through creative accounting. Entity attempts to move profits offshore but CTS ensures that some of that money is funneled back into the economy and promotes growth and domestic production.

13) Economy without income taxes and only consumption taxes: Entity again makes significant profits and attempts to move them offshore without spending gains back into the economy and paying consumption taxes. Once again, CTS captures a portion and funnels it back into the economy.

CTS is an elegant, flexible, multipurpose, powerful, nimble, respect garnering policy lever that every Central Bank should implement and have available for immediate access.