Three decades after its inception, the ‘Tobin tax’ has finally entered the mainstream political debate. Campaigners must now ensure its primary purpose remains to redistribute finance away from the failed banking system and toward benefiting the world’s poor, writes Anna White.
UK Prime Minister Gordon Brown sparked controversy at the G20 finance ministers’ meeting in Scotland by floating the idea of a global financial transaction tax as a means of mitigating the riskier activities of the financial sector. The tax was only one of four options proposed by the prime minister in his St Andrews speech, in which he called for “a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards”.
While his proposal received a frosty reception from the American, Canadian and Russian ministers as well as the financial sector in the UK, the idea of a so-called ‘Tobin tax’ is slowly gaining political momentum. This idea returned to public prominence last August when Lord Turner, head of the UK's Financial Services Authority, backed a tax on the "socially useless" banking sector. As John Hilary from War on Want notes in a rallying opinion piece, international interest has already culminated in a group of 58 countries launching an inter-governmental working group to explore the introduction of financial transaction taxes on an international scale.
The idea was also discussed at the G20 leaders’ summit in Pittsburgh earlier this year due to strong support from France and Germany. While the final communiqué did not specifically mention a global tax, it tasked the International Monetary Fund (IMF) to explore the various ways in which the financial sector could make a “fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system”. However, hopes that the outcome report from this investigation will include a Tobin-style tax have been dampened by comments from IMF managing director Dominique Strauss-Kahn who recently dismissed the idea as “unworkable”.
Much of the recent public debate has focussed on the specific functions of the tax. Ambiguities remain about which transactions the tax would be applied to, the level of taxation, whether implementing such a tax is technically feasible and, most importantly, what the ultimate purpose of the tax would be.
A Socially Useful Tax?
When James Tobin first pitched what became known as the Tobin tax in 1973, he suggested a 1% charge on all foreign exchange transactions to protect countries from market volatility caused by short-term currency speculation. His idea gained renewed interest following the Asian financial crisis of the late 1990s when a report by the IMF consultant Paul Bernd Spahn suggested a ‘two-tier Tobin tax’ designed specifically to short-circuit speculative attacks. In both proposals, the levy would apply solely to currency transactions with the primary aim of stabilising currency markets rather than raising revenue.
More recently, NGO coalitions such as Stamp Out Poverty and the International ATTAC Network have been campaigning for a modified version of the Tobin tax that is applied to every financial transaction in a given currency, rather than on every currency exchange in a given jurisdiction. This neatly sidesteps the need for global implementation, as national governments could independently legislate for a levy on all transactions made on their own currency, wherever they occur. At the proposed taxation level of 0.005%, the modified version also allays concerns that local finance industries would relocate abroad. As the All Party Parliamentary Group for Debt, Aid and Trade emphasises in a 2007 report, an entirely feasible stamp duty of 0.005% on all sterling foreign exchange transactions is small enough to avoid an exodus of the finance industry and would have generated £2.4 billion in 2007.
At such a small fraction of the originally proposed 1%, the stamp duty would no longer have the stabilising effect on global currency markets that James Tobin originally intended. For many organisations supporting this measure, however, the primary aim is not to alter market behaviour, but to raise finance for meeting the Millennium Development Goals or helping poor countries prepare themselves for climate change. Larry Elliot, economics editor at the Guardian newspaper, sees a Tobin-style tax as a possible way to break the deadlock over financing climate change adaptation in poor countries. “Without a willingness by the west to bankroll greener economic strategies in the developing world there will be no climate change deal,” he wrote in a recent column.
A growing body of research is revealing a variety of feasible models for implementing a financial transactions tax. Given the highly automated nature of modern day banking and the development of international transaction monitoring systems following the terrorist attacks in 2001, the technical issues surrounding implementation and evasion are problems of the past. The main obstacles do not relate to the technicalities of implementation, but to a lack of political will. Individual governments must take the lead and implement the tax unilaterally for there to be worldwide progress on this issue.
The most important challenge lies in ensuring that revenues from the tax are used for public rather than private benefit. Given the lobbying power of the finance industry, there is a risk that the funds raised could become nothing more than an insurance scheme for banks to mitigate future financial crises. If the initiative is left to the IMF or the US, this is a real possibility. While a Tobin-style tax is one way that bailed-out banks could pay back their debt to society, revenue must be directed to the world’s poorest if the levy is to act as a truly progressive and redistributive measure.
- Stamp Out Poverty
- Association for the Taxation of Financial Transactions to Aid Citizens (ATTAC)
- CTT Campaigns
- Collection of resources on currency transaction taxes
- The Tobin Tax Lives Again – Dani Rodrik