The European commission has formally adopted a proposal for a financial transactions tax (FTT — sometimes called a “Tobin tax” after the economist who proposed taxing currency trades). An FTT has long been championed by campaigners and this is regarded by them as a breakthrough. It is vehemently opposed by the Conservative government.
What is a financial transactions tax?
An FTT is, as the name suggests, a tax levied by governments on a variety of financial transactions, in the way that stamp duty is levied on housing transactions in Britain. It already exists in relation to certain financial transactions in Britain such as transactions in the stock market, where the stamp duty reserve tax is levied at a rate of 0.5% on all transactions.
Why are campaigners in favour of it?
There are two key arguments in favour of FTTs. The first is that, with governments struggling with high levels of both public sector debt and deficits throughout, it is only right that the financial sector makes some contribution in the form of new revenues. The second argument is broader, arguing that the financial sector is the primary cause of the current crisis. Therefore, while raising tax revenues from the financial sector, it is possible that the tax will have a deterrent effect on financial transactions in total. This could reduce the amount of speculative trading in particular.
Why is the British government so opposed to it?
The FTT would bring into the tax net entirely new types of transactions, such as foreign exchange trading and bond market transactions. London is the world’s leading centre for foreign exchange trading and the leading European centre for international government trade, as well as other assets. The government argues that the trade will migrate to other centres, such as Switzerland, New York or elsewhere. It argues instead that any FTT must be imposed multilaterally, with at least all the current major trading centres signing up simultaneously. Otherwise, it argues, total transactions will not decline but simply move to overseas centres, with the consequent loss of jobs and taxes from the British economy.
Will it work?
It’s much easier to impose taxes on assets such as shares because they are listed on a stock exchange. The exchange can refuse to register a transfer of ownership unless the tax is paid. By contrast, bonds and particularly foreign exchange are not registered anywhere. A German bank in Singapore can sell Japanese yen to a US hedge fund via its office in Bermuda. Set against that, there are two reasons to believe that the FTT would have an impact. The first is that it isn’t banks or securities firms who pay these costs at all, but their customers. Customers, like a company that needs to buy foreign exchange to fund building a factory, will still need the foreign exchange irrespective of a small transaction tax. But it might curb the operations of the hedge fund, which operates with very small margins of profit and does huge volumes of transactions. The second is that the banks and securities firms have huge investments residing in all the centres. Switching personnel away from the EU would entail an enormous cost.
But if customers pay the tax, not the banks, does the tax miss the target?
Not entirely. Companies will face a new tax but speculative activity may be reduced.
Is there a better alternative?
Yes. If the objective is to achieve greater tax revenues from the financial sector and change its behaviour, governments have enormous levers at their disposal. A straightforward tax on bank profits would work. Banks can’t relocate because the profits would be levied on their EU activities wherever they were headquartered. And they can’t pull out of Europe entirely because rivals would have a field day with the huge profits from all types of banking in Europe. Similarly, governments could change behaviour by imposing differential capital requirements, with, say, a 35% capital cushion required for proprietary trading in derivatives and a 3% cushion required for productive lending in housing, infrastructure and large-scale transport projects. This would “nudge” banks towards productive lending and away from speculation. Radically, given the bailouts, deposit guarantees and even bank licences, governments have the levers to force banks to increase their lending to the productive sectors of the economy.
This article first appeared at the Guardian.