Making High Finance Pay?

By Amy Trendle, January 30, 2011

Robin Hood Tax ad campaign projected on the Bank of England - Photo credit: Martin Chilvers

Robin Hood Tax ad campaign projected on the Bank of England - Photo credit: Martin Chilvers

The project to raise $400 billion every year for development projects and to fight poverty has never been closer to finding approval in the G20. Taxing speculative financial transactions could not but find favour with public opinion that is tired of the greed and profligacy of bankers. Will 2011 be the year of the Financial Transaction Tax?

Since the Nobel Laureate James Tobin floated the idea of a currency transaction tax back in 1972 during a lecture at Princeton University, the concept of taxing the financial services industry in one way or another for the greater good of mankind has slowly been gaining traction. The Financial Transaction Tax (FTT) has always remained somewhat on the margins of the G20 agenda as a slightly light-headed concept proposed by extremists and anti-capitalists, but with the recent global recession the idea has taken on a new life and found new advocates in high places.

At the World Economic Forum in Davos, President Sarkozy reiterated his call for a new financial sector tax to pay for development and climate change. The financier George Soros echoed the President’s words when he spoke at the same meeting.

The French president is fully in favour of the idea as is the German government to a lesser extent. The support might have remained patchy but the fact that France holds the presidency of the G20 in 2011 may well mean that the idea of a Financial Transaction Tax may make it on to the official G20 agenda after much haggling by the sherpas, the shadowy high-level diplomats who spend months defining the agenda. This could finally be the year of the FTT.

Banks are currently in such terrible odour and the whole issue of financial and banking regulation is still an ongoing process. Public support would be right behind the project. Banks would have a hard time dismissing the idea – it could even be seen as a possible atonement for their sins from having caused the global recession due to their profligacy, stupidity and greed. The bankers could maybe sneak their way through the eye of the needle – finally.

James Tobin initially saw the idea of a currency exchange tax as a way of penalizing “hot” speculative money that jumped in and out of currencies to make quick profits on the margins. The idea is nothing new, it was suggested by John Maynard Keynes back in 1936 as a way of linking investors more closely to their investments and discouraging speculators who invariably caused asset bubbles.

The initial criticisms of the Tobin tax were mainly based on the suggestion that the tax would not actually reduce volatility, despite the fact that it could possibly discourage speculation, but that the overall negative effect would be that the financial liquidity of the global markets would be diminished.

To obviate these criticisms, the search has been on to find the optimum Tobin Tax (now re-baptised the FTT) level which would raise funds for development while at the same time be sufficiently negligible so as not to interfere with the global economy. The suggested taxes have a range from 0.5% to 0.00006%. The percentage is indeed small but the money that could be raised would be in the billions.

Some early problems came to the fore: if it was not obligatory in every country, it would be easy to avoid (so how many countries, and which ones, would have to participate to make it worthwhile?); how could the tax be imposed, would investment banks and exchanges have to tax themselves? How would you deal with Over The Counter (OTC) transactions which are essentially off-the- books. And most important of all, how do you define speculation? Or is this just an excuse to tax the banks and redirect funds for the benefit of mankind, speculation be damned. Then of course there is the problem of who would receive the money, international aid groups, or would it be used to clear sovereign debt and for global emergencies?

Funds of ready cash like those that could be created by the FTT would be even more welcome as the US government and the EU are looking for money to salvage their economies. The idea that there could be a fund of several hundreds of billions of dollars to help them out would be more than welcome – the anti-capitalist tree-hugging stigma of FTT supporters has finally been shed: they have been joined by French and German Treasury Ministers!

Early in January as the French were launching their presidency of the G8 and the G20, President Sarkozy said that he saw the Financial Transaction Tax as not only a “moral” idea but also “useful as a way to discourage speculation and an effective way of finding new financial resources for development.”

The sums of money involved are still not certain but the current estimate is that the imposition of a minute tax of 0.05 % on each transaction, could generate $400 billion every year. Many of the countries who are severely in deficit see this as a mouth-watering sum, especially as it is not a one-off but an annual windfall. With governments world-wide being obliged to make draconian cuts to welfare and government spending, some additional funds would be welcome. However it will not have escaped the notice of the traditional supporters of the tax, such as Oxfam and the Attac group, that there appears to be a danger that the funds could be hijacked to save sovereign bond portfolios rather than be used for their original intent to fight poverty and aid the development process in developing countries. If the tax were ever to be agreed upon and imposed it might however make an ungodly sight to see central bankers, aid groups and Third World dictators tussling over this massive stash of free money.

One should bear in mind that this figure, huge as it is already, would be even larger if one were to include the off-the-books: transactions which are still not regulated (or poorly regulated) such as non-deliverable forward contracts and foreign exchange derivatives.

The United States is terrified that such a tax would “de-localize” the financial markets, in other words, investment bankers would merely perform these operations elsewhere and the US Treasury would lose valuable tax revenue and the United States its supremacy as the global locomotive of the financial markets.

The battle lines are drawn and currently the United States, Canada, Australia, China, India, and Russia (among others) are against the idea whereas France and Germany are actively supporting it.

The FTT is also finding unlikely supporters such as the High Level Advisory Group on Climate Change Financing at the United Nations which sees the tax as one of the most effective ways of collecting funds to cover the costs of mitigating the effects of climate change in the developing world.

However the EU members do not form a united front on this issue. The EU Commission itself has adopted a neutral stance and at the Ecofin summit at the beginning of September 2010, the opponents of the tax: UK, Sweden, Netherlands and the Czech Republic met head on with the proponents of the tax, mainly France and Germany supported by Belgium, Austria and Greece on the issue of imposing the tax exclusively in the EU or the Eurozone.

This year may still well be the year that sees agreement on the TFF but it will not be easy going. The NGOs and activist groups such as Make Finance Work, the Robin Hood Tax Campaign, the German Steuer Gegen Armut and the Italian Zero Zero Cinque will be busy putting a convincing case to members of the G20 but the terrain is clearly fertile; public opinion has never been more amenable and never has the project been so near earning pride of place on a G20 agenda.

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