“Tobin tax” gaining ground in Europe

September 21, 2009

No longer just a hopeless cause for anti-capitalist activists, the idea of a global tax on financial transactions is gaining ground in Europe.

European Union leaders could not agree to put it on the agenda of this week’s G20 summit on reforming the financial system in Pittsburgh, but the leaders of France, Germany and the European Commission endorsed the concept.

More strikingly, the head of Britain’s Financial Services Authority, which regulates the world’s second biggest banking centre, said last month that such a levy could help shrink a swollen financial sector.

“…If increased capital requirements are insufficient I am happy to consider taxes on financial transactions — Tobin taxes,” FSA chairman Adair Turner told Prospect magazine.

Nobel prize-winning U.S. economist James Tobin first proposed a small levy on currency trading in 1972 to penalise short-term speculation after the United States abandoned the gold standard and floated the dollar.

His idea found no takers then and lay dormant until the French-based anti-globalisation movement ATTAC (the Association for the Taxation of Financial Transactions for the Aid of Citizens) began campaigning for it in the mid-1990s.

In the meantime, the scope of the proposed tax, the policy objective and the proposed beneficiaries had changed.

French Foreign Minister Bernard Kouchner says he and British Foreign Secretary David Miliband have agreed to work on a proposal for an “international financial contribution” to fund development assistance. He estimated a voluntary contribution of just 0.005 percent on financial transactions
would raise 30 billion euros ($44.10 billion) a year.

Many key details remain to be worked out, such as who would receive and allocate the revenue and for what projects.  A plan will be put to a meeting of 58 nations in Paris next month to discuss innovative financing to meet the United Nations Millennium Development Goals. These involve eradicating
extreme poverty, hunger and disease, promoting gender equality,  health, education and clean water, and reducing child mortality.

Germany’s Social Democrats, junior partners in Chancellor Angela Merkel’s Grand Coalition which faces a general election next Sunday, say the proceeds of a Tobin tax should go to meet the costs of bailing out banks in the global financial crisis.

Don’t hold your breath. Agreement on such a tax is anything but imminent. Merkel, a political conservative, said it would only be feasible if all the world’s main financial centres agreed to levy it, and there is no sign that the United States is remotely interested.

Her support sounded like lip service, echoing widespread indignation among German voters at U.S. and British financial capitalism, which their leaders have blamed for the crisis.

Critics of the Tobin tax, including the banking and business lobbies, argue that a levy on financial transactions would drive business offshore, reduce trading volumes and liquidity, hit employment in the financial sector, harm shareholders and slow the world economy. They also say it would be hard to collect and easy to evade.

A lot of this is specious special pleading. Of course banks don’t want to be taxed on lucrative high frequency trading. But  there is no inherent reason why there should be a tax on buying a car but not on buying a derivatives contract. No one seriously argues that you can’t tax cars for fear of killing
jobs or driving the auto industry to Singapore or the Cayman Islands.

Moreover, it is hard to see why a fractional tax rate of 5 cents on every $1,000 would seriously impair liquidity. Britain has long charged stamp duty on share and real estate transactions, while the United States funds its regulators through a tiny levy on transactions.

The FSA’s Turner argues that diminishing the turnover of the financial sector would be a worthwhile objective in itself to reduce the amount of “socially useless activity”.

Perhaps the most salient criticism is that a Tobin tax would do little or nothing to deter risky financial engineering and excessive leverage. That is not its purpose.

With Western governments facing huge budget deficits and debt mountains due to the crisis, the funds available to help the poorest countries are bound to shrink unless new revenue sources are tapped. Taxing financial speculation is surely more appealing than raising taxes on income or labour.

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