Combining taxes and traditional instruments creates a positive feedback loop that accelerates both mechanisms.
Garbarino ’15 [Carlo and Giulio Allevato; Summer 2015; Professor of Law at the Universita Bocconi, Grotius Research Scholar at the University of Michigan Law School, Hauser Global Visiting Faculty at the NYU Law School, Visiting Professor of Law at the University of Michigan Law School, Visiting Professor of Law at the University of Florida School of Law, Visiting Professor at the University of San Paulo, Visiting Scholar at the University of Michigan Law School, Visiting Professor at Sorbonne University, Paris, Visiting Scholar at Yale Law School; Assistant Professor of Tax Law at the SDA Bocconi School of Management, Ernst Mach Scholar at the Institute for Austrian and International Tax Law, Vienna University of Economics and Business, Ph.D. from the Universita Bocconi, International Tax, LL.M. from the University of Michigan Law School; Michigan Journal of International Law, “The Global Architecture of Financial Regulatory Taxes,” vol. 36]
There is an additional important feature of regulatory financial taxes - the potential impact of such taxes on and their interconnection with direct regulation. This interconnection constitutes, as mentioned in Part III, the third layer of the choice architecture of financial regulatory taxes.
In a broad sense, there are two aspects of this interconnection: first, both approaches are aligned as to their goals; and second, both approaches are functionally interdependent.
The goals of these two policy approaches are aligned, because they both operate as preventive measures against negative externalities. Regulatory taxes, by attributing a certain cost ex ante, leave to the market mechanism the reduction of potential negative externalities. Direct regulation, on the other hand, compels ex ante certain kinds of behavior that are expected to reduce risks because they have a tendency to create negative externalities.
In particular, regulatory taxes can address one or more of the central externalities (for example, volatility through FTT or excessive risk through a liabilities-based levy), while improved traditional regulation can cover other externalities and behaviors or reinforce the impact of regulatory taxes.
Furthermore, financial regulatory taxes and direct regulation are functionally interdependent for two reasons. First, there is a feedback loop between these two policy approaches. Regulatory taxes should be able to reduce negative externalities, and this, in turn, should facilitate the similar task of direct regulation. At the same time, however, direct regulation should be able to reduce negative externalities, and this, in turn, should facilitate the similar task of regulatory taxes. Because of this expected feedback loop, the more that negative externalities are reduced by regulatory taxes, the more direct regulation will more easily achieve its goals, and vice versa.
Second, there is a symbiotic operation 159 of these two approaches. On the one hand, regulatory taxes extract earmarked revenues used to finance the administrative costs of direct regulation. On the other hand, heightened direct regulation reduces the need for further funds for its financing. In practice, the more funds raised by regulatory taxes, the more resources that are available for direct regulation. Through the gradual reduction of negative externalities by heightened regulation, lower amounts of financial resources extracted by regulatory taxes are needed.
It could therefore be reasonably expected that the feedback loop between these two policy approaches and their symbiotic operation would lead to recurring cycles of further reductions of negative externalities. Moreover, financial regulatory taxes present two important comparative advantages in terms of practical feasibility over direct regulation, which significantly contribute to making the former critical to the achievement of the regulatory goals.